The Answer to the Query in Today's Second Buzzy Article?

It's a hard factual --- No!  As it happens, even the eurozone Central Bank  (the European Central Bank) --- which covers 16 of the 27 EU member-states (including large countries like Germany, France, Italy, and Spain) --- has drifted into a state of discontent and controversy, aggravated by the failures of the West European giants to cold-shoulder a joint EU rescue for the financially hard-hit and economically distressed East European members of the EU . . . some 12 in all.  Remember here: 15 West European member-states constituted the EU at the start of this decade.  Twelve of those 15 set up and joined the eurzone; tiny Sweden, tiny Denmark, and giant Britain (60 million population, like France's and Italy's) stayed outside and have control over their interest rates and the exchange-rate of their national currencies.

If 27 EU member-states --- all democratic, all market-oriented, all interacting daily through a variety of regional EU institutions --- can't agree on a coordinated financial plan amid the EU's worst crisis ever, then what are the prospects for 100 or 180 countries around the world to agree on the nature and functions of a global Central Bank, lender-of-last-resort, overseer of exchange rates, and super-regulator of financial markets?  And exactly who would it be accountable to?

The Buggy Analysis in Depth

Click here for the buzzy take at Economist's View . . . though it would be helpful if you read the previous buggy article and link posted earlier today.

The Answer to the Query in the Subject-Title

It's very unlikely, not least because that gap runs deep and wide and has been aggravated by excessive criticisms on both sides of the Atlantic . . . not to mention, if you're awaiting the G-20 meeting in London next week, by the growing discontent in China and India and some other developing countries with American and EU dominance of the international monetary and financial systems.

Click here for a lengthy prof bug buzzy commentary on this gulf, which you'll find at Professor Mark Thoma's Economist's View . . . a very good economic blog.  Note the general absence of evidence, never mind easy-to-muster economic quantitative data, to back up the arguments by Paul Krugman and the subsequent posters --- with one exception, the bugged-up  analysis left buzzing around the thread.  Run a search for "the buggy professor".

Today's Buggy Topic

The topic was inspired by a couple of posts by Professor Mark Thoma, a macroeconomics professor who runs the laudable web site Economist's View, both of which dealt with the troubles that plague mainstream economics . . . the troubles multiplying and underscored by the failures of virtually all big-name economists to anticipate the current global financial and economic meltdown.  Nor is that the end of the troubles.  They've been compounded by the noted backbiting feuds among different economic camps --- especially New Classicals (the dominant economic paradigm since 1980 or so) and New Keynesians, who have adopted many of the basic microeconomic and macroeconomic  concepts that New Classical economists have spun over the last few decades.

Click here for prof bug's own take on why better data, better mathematical modeling, or even better use of new general economic theories are not likely to be a serious guide to predicting future system-wide breakdowns of the sort that have plagued economic theorizing to data.  And quite simply because the experts in economics --- like their counterparts in finance, political science, psychology, sociology, and history --- have a terrible record when it comes to predictions.  To put it bluntly, they do little better than taking any child, blindfolding it, and having it throw a dart at a target full of alternative possibilities. 

In the Meantime,

to make sense of the debate about experts' failures in economics --- which means you need to read and understand Professor Thoma's post, the linked article he refers to, and the various comments in the thread that follows --- consider the postulates and differences between the two dominant economic theories about the overall behavior of the economy . . . especially when it comes to recessionary tendencies that are built into the business-cycle. 

   Oh wait.  It just dawned on buggy's mind.  Before you read the post by Professor Thoma linked to a few moments ago --- along with prof bug's stuff by way of reply --- you might find it very useful and possibly a pre-requisite to read the previous Thoma-post and exchanges that excited so much to-ing and fro-ing, along with some anger, among economists and other posters about the utility of mathematics in contemporary economic theorizing.  Click here for it.  Be sure to read the lengthy exchanges that follow, none of which involve prof bug: he preferred to post his sagacities in the subsequent Thoma-post, linked to earlier here. 

  And come to that, you might enjoy and find profitable a couple of follow-ups at the Thoma site: Click here, then here.  Always assuming that prof bug doesn't get kidnapped and go sky-rocketing with malevolent ET-like creatures to another galaxy, he is very likely --- when he gets the time --- to post a lengthy comment in that latter Thoma-linked thread.  As you can see, it deals with the need to consider the psychological aspects of economic and financial behavior that hardly square with rational-behavior assumptions . . . a matter to which we now turn.

The Key Theoretical Postulates of New Classical Economics 

 They amount to about eight in number. 

    1)  The representative economic and financial agent (person)  is fully rational and makes the best use of the information available to him or her in their behavior as workers, consumers, savers, investors, and business managers . . . including financial ones --- rational expectations.

    2) These economic agents have as much information available to them about the economy's workings and current state-of-affairs as any expert economist or economic or financial regulator --- no asymmetrical information to mark their behavior.

    3)  Financial markets have interest rates and prices of bonds and stocks  that reflect accurately all the information available to anyone --- the efficient market hypothesis.   

      4)  Financial managers and investment specialists will carefully adjust their risk-taking advice and behavior in order to look after the self-interests of their investing clients --- there are no principal/agent conflicts of interest.

      5)  And all markets --- labor, product, savings-and-investment --- are always in equilibrium, thanks to total price flexibility,  unless dislocated by external (exogenous) shocks such as big breakthroughs in new technologies or sudden shifts in consumer preferences (say, for Asian as opposed to American cars as occurred in the early 1980s and again more recently) or the availability of natural resources caused by wars or by unanticipated manipulations of supply and prices by a cartel like OPEC . . . though even OPEC's governments will eventually adjust their behavior in line with long-term enlightened self-interest that reflects the market-oriented interests of their consuming countries and representative economic agents.

Enter Business-Cycles and the  Long-Term View of Market Economies in New Classical Economics . . . Which Entail:

 . . . marked limits on counter-cyclical fiscal and monetary policies for fighting recessions . . . however severe.

Today's Buggy Topic

Don't let the little bit of jargon in the subject-tile --- "Ricardian equivalence" --- put you off if you don't know much economics.  Ricardian refers to David Ricardo, a follower of Adam Smith in the early 19th century --- and along with Smith and Thomas Malthus, the most famous of the "classical economists" who, together --- with John Stuart Mill somewhat later --- created the basis of modern free-market economic theory.  

Ricardo's Influence

Ricardo is most famous for explaining the theorem of comparative advantage as the linchpin of free-trade across the borders of countries: namely, even if one country (A) were hypothetically able to produce all its agricultural and manufacturing goods more efficiently and hence cheaper than country B, country A would still benefit if it opened up trade with B.  That's because A's workers and firms can't be equally efficient at all its production.  Similarly, though B is "absolutely" disadvantaged, it is less disadvantaged in some goods than others.  If A and B trade freely with one another --- no tariffs or other trade-barriers --- then market prices of A's and B's goods in their home markets will direct production in each country toward where it is most advantaged and least disadvantaged.  And so both countries will be able to consume beyond the limits of their productive capabilities.

Later on, free trade also was found to entail all sorts of other, more dynamic advantages.  Think of quality: think, more specifically, of how Japanese car companies have improved enormously the quality of autos available to Americans compared to the 1960s and 1970s.  Think of the boost to economic growth: as the US has globalized since 1980, its growth rates in GDP and productivity --- which had been declining over the previous two decades --- have been rejuvenated.  Think of the impact of ideas as they cross frontiers --- and, by adding new competition, facilitate the movement of US firms either to become leaner and more efficient or fail and hence release capital and skilled labor to move into areas like computer software and aerospace where they are world class. 

Enter Ricardian Equivalence

Developed by Ricardo back in the 1820s and 1830s, this concept went into oblivion more or less until it was revived in the 1970s by an influential New Classical economist at Harvard --- Robert Barro.  It is usually called the Ricardian-Barro Equivalence Theory as a result. 

The key idea? 

It doesn't really matter if increased spending by a government --- say, the US federal government to fight recession --- leads to deficit spending financed by new taxes or debt: exactly how the US Treasury does so, by issuing bonds that the Federal Reserve sells to the public now.  Whether financed by borrowings from the public or by current taxes --- say, by a tax increase later this year or by debt --- the public knows that sooner or later taxes will have to be raised to pay both the interest and principal on the debt.  Assume then that the public is rational and understands this.  In the upshot, the public will reduce its consumption and save more, knowing that some time in the future --- maybe years from now, maybe even in the next generation --- they or their heirs will have to pay more taxes.  The increased savings will, therefore, reduce or totally nullify the fiscal stimulus.

Enter the Buggy Slant on This

It's found in a fairly lengthy --- but easy-to-follow --- post that prof bug left earlier today at the web site of Professor Mark Thoma, Economist View.  Click here for the bugged-out comments.

Oh, by the way.  As it happens, there's usually another poster at that site who signs on as Gordon --- no relation to me whatsoever; and with a far different viewpoint on things.  I always log on as the buggy professor, but confusion arises because some people later in the threads refer to me as "gordon" or "BP" and not buggy professor. 

The Answer to the Subject-Query?

It's set out at length, with lots of historical and definitional steps in the analysis --- backed by a lot of historical data --- in a buggy post left at Economist's View . . . an unusually good economic blog run by Professor Mark Thoma of the University of Oregon, himself a New Keynesian macro-economist.

And as  you'll see if you click here, that bugged-out commentary links at the end to an even longer post left last October (2008) by prof bug on why socialism has had virtually no influence in the United States.  No, not even as in Britain, Canada, Australia, and New Zealand --- where moderate, non-Marxist Labor parties emerged early in the last century.

Today's Second Buggy Topic

It's lengthy and, prof bug hopes, easy to follow on an economist whom he has always admired --- and for several reasons that you will understand if you click here for the Marginal Revolultion link . . . the economic site run by a commendably flexible and knowledgeable economist, Professor Tyler Cowen of George Mason University. 

Today's First Buggy Topic

At his laudable web site --- Economist's View --- Professor Mark Thoma of the University of Oregon, a New Keynesian macroeconomic specialist, posted a provocative commentary on Transatlantic differences in dealing with the current global financial and economic crisis.   In turn, his commentary encased a good lengthy analysis of the internal-conflicts within  the EU itself by a notable European economist . . . the analysis left at a good economic site run by European economists in the US and in Europe itself. 

Several dozen people replied to the Thomas-post and the European professor's analysis.  Prof bug himself left three fairly long replies, which mixed economic and political matters.  Click here for those replies, then run a search in your browser for "buggy" a good three times. 

The Answer To the Lead-off Question Above:

Not much, if at all.  And for the lengthy reasoning behind this buggy claim --- with to boot the concrete evidence underpinning it --- click here . . . in a thread found at the Marginal Revolution, the laudable web-site run by Professor Tyler Cowen.

The Answer: Yes and No

The basics of our mixed market-economy --- which generally has had  much less statist regulation, lower taxes, and lower redistribution of income by means of governmental policies, a similarity shared by Britain, Australia, New Zealand, Ireland, and to an extent Canada: in short, the major English-speaking rich countries --- will undoubtedly remain intact as we emerge from the current crisis. 

There will still be a largely private enterprise system, more entrepreneurial dynamism than found in other industrial countries --- an observation pinned down by numerous cross-country survey-data, an unusually high-quality R&D base, and as a match to all these national economic endowments, a vigorous pace of innovation across the entire economy itself.  That said, there will also be far more energetic and watchful regulation of financial sectors, a likely reduction in defense spending as governmental expenditures shift more toward a larger government role in health care --- with, we hope, a gradual reduction in current health spending as a percentage of GDP (around 15%, about 40-50% higher than in other industrial countries) --- somewhat higher taxes on the very affluent and rich . . . and so, as you add it up, an overall larger role for the public sector. 

Beyond that, who knows? 

 We have very flexible institutions in both the public and private sphere . . . not to mention a population that is unusual among advanced rich countries for its adaptability and acceptance of change.  Innovation of all sorts will be booming with high-octane vigor over the next decade . . . just as it did in the era of the Great Depression of the 1930s, during WWII, and repeatedly since 1945.  In effect, as recent scholarly work has shown, so far the USA is the only country to have fully exploited the productivity-enhancements inherent in the Internet age.

Enter Today's Commentaries on This Subject

At two different economic web-sites --- one run by Professor Mark Thoma (a New Keynesian) and the other by Professor Tyler Cowen (a flexible and moderate libertarian) --- prof bug engaged their initial posts, then other professors in his lengthy replies.  The general thrust of these replies?  The buggy stress on the role of institutions in handling effectively or not major disruptive shocks to different national economies across the world.   Oddly, it's a subject ignored by probably 95% of well-known economists.  These days, you see, the big rewards in economics come to the use of formal and abstract statistical models, which have trouble coping with the realities of concrete institutional frameworks for each society.

No need to say more.

Start here for the initial buggy commentary, found at Professor Thoma's Economist's View.  Be sure to run a find --- "buggy" --- for some replies.  Then go to the Marginal Revolution and click here for prof bug's lengthy 2nd comment . . . followed on the next page by a brief one and a reply by others to that 2nd comment.