Reading this blogpost helped me land upon this link. The book is titled Postwar Economic Problems, edited by Seymour E. Harris.
The introduction begins with the following sentence:
“Win the war first” is a sensible slogan. But all agree that if we do not also win the peace, we shall have lost the war.
It is hard not to be hooked!
From the same chapter, a little further down, a whiff of a familiar problem:
It will be necessary to stimulate consumer spending if a high income level is to be attained and maintained. Provision of security and an accompanying stimulation of spending; the further spread of education; an improved distribution of income; community spending for consumption—all these will be required.
The authors include, among others, Hansen, Samuelson, Haberler, Leontief, Schumpeter, Kindleberger and Lerner.
You could do a lot worse than skim through the book right now. The numbers aren’t relevant today, of course, but the line of thinking is bound to be.
Simran, a first year BSc student at the Gokhale Institute writes in with this question:
Why is it that some developed countries have 0% interest rates? How are they sustained and is that a mark of a developed country? Is it good/ bad?
Is it related to their inflation rates? Because that’s the only thing I could think of.
They (the BSc students) will have macro only in the next semester, and I’m sure this question will be dealt with then. (I can’t resist adding that the question of how those classes will be conducted is topmost on my mind right now!)
But how would you go about answering this question when your audience has not been subjected to a semester’s worth of classes in macroeconomics?
The challenge I have set myself is that I will not refer to a single economist, or theory, while answering this question.
So: let’s think of it this way, Simran – you have a hundred rupee note with you, and I need a hundred rupees. So I approach you, and ask if you would be willing to give it to me. We’re both students of economics, you and I, so you quite reasonably ask what you will get in return.
Since I have nothing to give you right now, I say well, how about this: I’ll take a hundred rupees from you today, and give back an amount more than that a year from now.
That excess amount, obviously, is the rate of interest. But how much should it be? You would like two hundred rupees a year from now, and I might propose a hundred and one. Neither one of us is likely to accept the others proposal, and so we start looking for other people to cut a deal with.
You start to look for folks who are open to the idea of borrowing a hundred rupees from you, and returning two hundred (or thereabouts). I, on the other hand, start to look for folks who will lend me a hundred, and accept one hundred and one from me.
We, you and I, are now participants in the financial markets of our country. You are on the lender (or supply) side, and I on the borrower (or demand) side.
If there are a lot of people on Team Suppliers, you guys will find it difficult to find the same number of people willing to borrow. And so some of you might decide to cut the rate at which you are willing to lend. And if these financial markets are efficient – what that means is people are easily able to find out the rate/price at which transactions are taking place – then the rate of interest will come down.
Ask yourself what might happen if there are, instead, a lot of people on Team Borrowers.
Well, during these times, can you imagine a lot of people looking to borrow? I, for one, can’t imagine people wanting to set up factories, buy new TV’s, buy new houses etc. There’s hardly anybody playing on Team Borrowers!
But practically everybody in these financial markets is on Team Lenders! And so rates are going to come down:
In fact, right now, there are so many people on Team Lenders right now, that interest rates are not just down to zero, they may well end up being negative! That’s right, you will have to pay to put money in the bank in some of these economies, and you will be paid if you borrow. Boggles the mind, but true!
And kudos for asking if interest rates are linked to inflation – yes, absolutely. But I’ll take a rain check on answering this question right now, simply because it takes us into really deep waters. Macroeconomists are prone to start squawking indignantly whenever they start thinking about inflation and interest rates (myself included), so this is best left for another day.
But for the moment, here’s the key takeaway: there are far too many people on the lending side, and nowhere near enough folks on the borrowing side, and so the price of this market – interest rates – will fall. More so in developed countries than in developing, perhaps, but they’ll fall the world over.
Economists, and students of economics, are fond of using the quote “In the long run, we’re all dead”, attributed to John Maynard Keynes.
Except, the quote wasn’t used (at all) by Keynes in the spirit in which it is often quoted by folks today – the exact opposite, in fact.
But when we do talk about the long run, we economists (or students of economics) would do well to understand that there are many definitions of the long run. And in the longest run of all, yes, we are all well and truly dead.
And that’s one of the reasons behind choosing that video yesterday. Also, a tip that I myself learned only recently: tapping on the right of the screen on your phone in the YouTube app fast forwards the video by ten seconds, and pressing “L” on the keyboard has the same effect on your computer.
You might have been hearing/reading about MMT recently. Today’s set of links is really one place to read a lot of back and forth between two economists about what MMT means in practice – plus an additional bonus link, and a Twitter thread.
You absolutely should read each of these links if you are a student of macro. You probably should read these links if you are interested in the economy – but in this case, feel free to skip some of them. I leave it to your judgment.
“OK, Lerner: His argument was that countries that (a) rely on fiat money they control and (b) don’t borrow in someone else’s currency don’t face any debt constraints, because they can always print money to service their debt. What they face, instead, is an inflation constraint: too much fiscal stimulus will cause an overheating economy. So their budget policies should be entirely focused on getting the level of aggregate demand right: the budget deficit should be big enough to produce full employment, but no so big as to produce inflationary overheating.” Paul Krugman gets the ball rolling by explaining what Abba Lerner’s work was all about, why it made sense then, and perhaps doesn’t now.
“Outside of the so-called liquidity trap, Krugman adopts the standard line that budget deficits crowd out private investment because deficits compete with private borrowing for a limited supply of savings.The MMT framework rejects this, since government deficits are shown to be a source (not a use!) of private savings. Some careful studies show that crowding-out can occur, but that it tends to happen in countries where the government is not a currency issuer with its own central bank.” Stephanie Kelton responds by pointing out what she sees as the flaws in Krugman’s argument. I have had difficulty in understanding this part myself, which is why I have highlighted it.
“So let’s be clear here: Are MMTers claiming, as Kelton seems to, that there is only one deficit level consistent with full employment, that there is no ability to substitute monetary for fiscal policy? Are they claiming that expansionary fiscal policy actually reduces interest rates? Yes or no answers, please, with explanations of how you got these answers and why the straightforward framework I laid out above is wrong. No more Calvinball.” Of the questions that Krugman raises by way of response, it is the second one that strikes me as being at the heart of the issue. Expansionary fiscal policy reducing interest rates boggles the mind – well, my mind, at any rate.
“#3: Does expansionary fiscal policy reduce interest rates? Answer: Yes. Pumping money into the economy increases bank reserves and reduces banks’ bids for federal funds. Any banker will tell you this.” I have read Stephanie Kelton’s response, and re-read it, and I find myself confused even then. Expansionary fiscal policy, she says, does reduce the federal funds rate. I found this confusing…
Until I read this twitter thread by Paul Krugman…
So one thing I learned from the past few days of discussion is that MMTers believe that budget deficits necessarily increase the money supply. That's an interesting view, where by "interesting" I mean "completely wrong" 1/
“Each of these imbalances is important and needs to be rectified. One has to do with the differing levels of per-capita consumption of basic public goods and services. The other has to do with the differing levels of stock of infrastructure leading the differential growth accelerating potential development. These are two distinct policy goals and following Tinbergen Principle warrants two distinct policy instruments. Eliminating the Planning Commission and replacing this with NITI Aayog merely as a think tank leaves us with only one instrument; namely Finance Commission. This approach if not reviewed can lead to a serious problem of increasing regional and sub-regional inequities.
Who better than Dr. Vijay Kelkar to tell us more about Niti Aayog 2.0? You might want to look up the Tinbergen Principle if you do not know about it already. (Via Mostly Economics)
“Last year, at the end of the summer melting season, the team drew lines on the stakes marking the height of the ice, as researchers have done here for decades. Now, looking at a stake nearly a year later, Nikolay Kasatkin, one of the institute researchers, and Dr. Shahgedanova saw that more of the wood was visible. With the end of melting still a couple of months off, parts of the Tuyuksu were already about three feet thinner.”
The NYT does excellent work tracking climate change, and this article is only the latest in a long string of articles entirely worth reading. Best viewed on a desktop.
“ICICI directors shouldn’t get a free pass from regulators. Otherwise, they’ll just show up at other boards, perpetuating a culture of CEO worship that’s at odds with their role as stewards of public shareholders. Indian investors deserve better.” Andy Mukherjee doesn’t mince words while talking about the lack of oversight at the board level in ICICI Bank. What might the situation be like at other banks in India?
“It can be easy to think of a calendar as a scientific given, or a reflection of the laws of the universe. In fact, as these holidays remind us, there are as many ways to track time as there are cultures and languages. Each calendar reveals something about how the people who created it relate to the world around them while also preserving rich cultural identities and memories.” A nice read from the NYT about the way different cultures track time – as it turns out, there are many ways to measure it – the lunar and the solar calendars happen to be just two of them.
“India’s first education policy was framed in 1968 based on the famed Kothari Commission report, the second in 1986 and the third—a revision of the 1986 policy—in 1992.The official cited above said it’s not as if the previous policies were implemented quickly. In fact, making eight years of education compulsory was part of the 1968 policy but it was implemented only in 2009 through the Right to Education Act.” A depressing read, particularly for me, but the state of India’s NEP today mirrors much of India’s inaction on this in the past.
“We probably would not have planes, trains, or automobiles if we had insisted on today’s safety levels during the early days of those technologies’ development—likewise, we should have laxer safety standards for new emerging technologies.”
Worth reading this for many reasons. Don’t miss the bit about the need to change ideological commitments on the basis of rationally-arrived-at conclusions, for example. But that excerpt above is a great way to understand the concept of, and the importance of, opportunity cost.
“I want to make it clear that although enriched environment dominated the 20th century, IQ gains are not destined to persist like the law of gravity. Factors that were immediate triggers of IQ gains included more adults per child in the home, more and better schooling, more people at university, more cognitively demanding jobs, and better health and conditions of the aged. There are signs that these are beginning to show diminishing returns.”
The Flynn effect is one of the more interesting things you can learn about – and having learnt about it, it might interest you to know that the Flynn Effect may now be reversing.
“They’re having a fight about the wall except the wall is the English Channel: half of these people want to turn the English Channel into a wall to keep out their version of the Mexicans.” An interview with Anand Giridharadas about the perils of philanthropy. Worth reading, not necessarily to agree with everything he has to say, but to think about was in which he may be right.
“So, for example, if people don’t take into account the macro consequences of their borrowing, then they could borrow collectively at the same time, which might be rational from an individual perspective but that collective borrowing leads to future problems such as a foreclosure problem that has spillovers for everyone in the economy. When people borrow individually, they may not take into account those spillovers. And so, again, from a macro perspective, people might over-borrow.For all of these reasons, a possible result conceptually is that if and when credit expands, it is possible for households to over-borrow, to overstretch from a macro kind of social perspective. And that over-borrowing, that overstretching during the boom phase of the credit cycle, can then come back to hurt on the downside and lead to a deeper recession than it would otherwise have been.”
This much is straightforward for a student of macroeconomics – but the rest of the interview with Atif Mian is worth reading for how he teases out the mechanisms of thinking about the follow-up questions in the context of today’s economy. If you want to learn how to think like a macro-economist, this interview will help.
This will be an intertwined, five part series, born out of a rabbit hole I fell into, and spent an evening over.
“As we try to understand the world of the next three decades, we will desperately need economics but also political science, sociology, psychology, and perhaps even literature and philosophy. Students of each should retain some element of humility. As Immanuel Kant said, “Out of the crooked timber of humanity, no straight thing was ever made.”” Fareed Zakaria isn’t too impressed with the state of economics today, and says that a more holistic approach is needed. Holistic is a fancy-schmancy word that is far too over-used – but essentially, his point is we need to read wider (ahem), and be rather more aware of the fact that math is way overrated.
“Managing globalization, supporting a healthy middle class in an era of artificial intelligence, and incentivizing the preservation of the planet must be among the central challenges, if not the central challenges, of our era. If not from economic analysis, it is hard to see where resolutions will come from. Everyone, whether they like economics and economists, or whether they resent and distrust current economics, has a stake in the discipline being relevant and successful going forward.”
Yes, but what about the opportunity cost of abandoning economic theory? That in effect, is what Larry Summers says in this essay, penned in response to the original. Sure, economics has its flaws, and sure, it has had to evolve over time, but surely that is a good thing?
“The problem, however, is that there is also the unprofessional How Tax Reform Will Lift the Economy: We believe the Republican bills could boost GDP 3% to 4% long term by reducing the cost of capital. It seems that every Yellen is offset by Holtz-Eakin, every Rajan by a Taylor, every Shiller by a Barro, every Krugman by a Boskin, and so on. And how is a Fareed Zakaria or a Binyamin Appelbaum supposed to disinguish those who have knowledge from those who have only ideology, or indeed from those who can and do switch their approval and disapproval of policies on and off upon changing demands from changing political masters?” Well, yeah, maybe, says Brad DeLong, in response to the question posed by Larry Summers above, but Fareed may have a point, still. Economists are nowhere near as consistent as they ought to be, and that ought to count against us.
“Rather than suggesting coherent policies, Moore and Laffer seem to hope that a much more rapidly growing economy will provide the resources to address all these problems, and they seem to believe that this growth will follow ineluctably from the lower taxes and deregulation that lie at the heart of Trump’s agenda. It would be wonderful if that were possible. Maybe rah-rah partisans really believe it is. But more likely, it is just wishful thinking. ” N. Gregory Mankiw highlights some of the problems that Brad DeLong gets so upset about in a wonderfully provocative article.
“On the other hand, economists do turn out to know quite a lot: they do have some extremely useful models, usually pretty simple ones, that have stood up well in the face of evidence and events.”
Paul Krugman, who writes as well as anybody else, ever, in the field of economics – if not better – makes the point that simple economic models are surprisingly easy to understand and teach, and they work.
“If there is one number that can make the edifice of budgetary arithmetic collapse and impair the growth prospects, it is the movement of crude oil prices. If for nothing else, but simply reduce the vulnerability of the fisc, this should be done. For, it is the “resource deficit” of the country which is the single biggest threat to sustained growth of 9%”
How might a new age budget look like? Haseeb Drabu takes a look at the ways – five of them. You’ll be reading this by the time the budget has come out, of course, but it still makes sense to read this in order to think about how the budget needs to be structured.
“The 0.9 per cent year-on-year (YoY) growth in the adjusted net profit of 385 companies, which have released their results for the third quarter (Q3) of the current financial year so far, does not inspire much confidence. If financials and energy companies are removed from the sample, net profit has grown 6.4 per cent in Q3 — the worst performance in five quarters.”
I’d recommend that you read this article to either get a sense of how to judge the macroeconomic environment (partially!) on the basis of stock market performance, or even better, if you are new to finance, read this with an Investopedia tab open alongside.
“Passenger vehicle sales in China fell for the first time last year since the early 1990s due to a cut to government tax breaks and wider economic sluggishness. Hyundai, which was once the third-largest automaker in China together with Kia, is now sorting out overcapacity as its sales in China have not picked up much since being hit by the anti-Korean consumer backlash in 2017.”
The FT provides additional information on the slowdown in China – and the link on the anti-Korean backlash is also worth reading.
“From the start of 2012 to the end of 2016, China produced nearly three times as much cement as the US did in the entire 20th century.Much of that investment has gone to waste. A recent study by China’s Southwestern University of Finance and Economics estimates that more than one in five Chinese homes in urban areas, or about 65m apartments, are empty. And if demography is destiny, China’s prospects are bleak. Between 1980 and 2012, China added about 380m people to its working-age population. But that number has been shrinking for the past five years and is expected to fall by a third, or about 220m people, in the next three decades.” More grist to the China recession mill, from the FT. The numbers are truly breathtaking – especially that quote about cement!
“China’s fertility rate has officially fallen to 1.6 children per woman, but even that number is disputed. Yi Fuxian, a professor at the University of Wisconsin-Madison, has written that China’s government has obscured the actual fertility rate to disguise the disastrous ramifications of the “one child” policy. According to his calculations, the fertility rate averaged 1.18 between 2010 and 2018.” The NYT picks up from where the FT left off, and tells us about the impending population crisis in China – that there may soon be too few people in China, not too many.
We’ve been speaking about growth in our series this month, and we’ve learnt that measuring growth is both important and tricky. But remember, by definition, growth by itself is meaningless unless you ask about time. That is, it isn’t much to say that something grew. How long did it take for it to grow is an equally important question!
The fancy-pants way of saying this is is to say that growth is a flow concept. What that really means is, we measure something perunit of time. If we measure something ata point of time, we call it a stock concept. Stocks and flows – keep those concepts in mind, because they keep recurring in economics.
All right, so growth is a flow concept, and we need to think about growth in terms of time. Fair enough: how long is appropriate? A month? A year? A decade? Even longer, or even shorter?
As it turns out, there is no right answer to this question. Think about a baby being taken to her pediatrician. The parents will naturally be anxious to find out if their child is growing normally, which means they want to know more about the long term growth prospects for their baby. Will she, five, ten, fifteen years down the line, be as tall as her peers, or not? What about her weight? These, and other questions, are long term questions – we’re talking years, not decades.
But hey, the parent’s might have bought in the baby because she’s running a temperature. In this case, the parents want to find out if their child will have a temperature tomorrow or not. These kind of questions are short-term questions.
Similarly, economists think about what India’s economy will look like next month, but also worry about whether we will be developed by 2030. We can’t be developed if we don’t grow in any month between now and 2030, so the monthly prognosis is important. But the long term prognosis also allows us to make corrections whose impact will be felt only in the long run.
For example, reducing interest rates today will impact financial markets tomorrow directly. But deciding to build a network of highways across the country is a multi-year project whose impact will take time to materialize, and will then be felt for many years at a stretch.
And so when we think about growth, we’re thinking about both the long term, and the short term, India growth story. It helps, however, to be very clear about the whether the precise economic problem we’re dealing with needs long term thinking, or short term thinking, or both.
Interest rate changes by the RBI? Short run policy. The Union Budget, announced every year? Short run policy. Plans by the Niti Aayog to electrify every village by 2020? Long term policy.