Hoe de economie de economische crisis heeft overleefd.

Jan 18, 2018 Robert Skidelsky

LONDEN – De tiende verjaardag van het begin van de Grote Recessie was aanleiding voor een elegant essay door Nobelprijswinnaar Paul Krugman, die noteert hoe weinig het debat over de oorzaken en gevolgen van de crisis het afgelopen decennium veranderd is. Terwijl de crisis van de jaren dertig de Keynesiaanse economie voortbracht en de stagflatie in de jaren zeventig het monetarisme van Friedman heeft de Grote Recessie geen vergelijkbare intellectuele verschuiving geproduceerd.

Dit is een zeer deprimerend gegeven voor jonge economiestudenten die hoopten op een passende en uitdagende respons uit het vakgebied. Waarom is die er niet gekomen?

Het antwoord van Krugman is zoals altijd ingenieus: de oude macro-economie was zoals het gezegde gaat ‘goed genoeg om mee te besturen.’ Nog een crisis zoals in de jaren dertig werd voorkomen. Dus studenten moeten ophouden met dromen en hun huiswerk doen.

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Robert Skidelsky

Writing for PS since 2003
194 Commentaries

Robert Skidelsky, a member of the British House of Lords and Professor Emeritus of Political Economy at Warwick University, was a non-executive director of the private Russian oil company PJSC Russneft from 2016 to 2021. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

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ron smith Mar 6, 2018

"Radical uncertainties" should be read "Complex systems which include non-stationarity and shifting feedback loops". No economist or economic theory will ever be able to write a differential equation that allows for prediction to "within epsilon for all positive epsilon". Working economists, i.e. those of us in the investing sector, did expect a major down turn even though no one tried to answer the unanswerable question, "How far is down this time." Note that a few hedge fund managers, those who bet big, using the banking empire's unregulated derivatives literally made billions for themselves.

However, as another comment asserts, the problem is that the politicians control the governments' responses to economic crisis and politicians, especially the American red state elected, are far more interested in lining their own pockets than in doing the job they were, at least nominally, elected to do. Query: Is Boris Johnson merely an ineffectual Mitch McConnell?
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nestotor Feb 15, 2018

The problem is not Keynes or not Keynes, the problem is Kuznets. Describing the past is absolutely not understanding the future and in reality I tell you, all our econometrics smokes the carpet. All the concepts of GDP or inflation are very very debatable, but unfortunately never discussed

Le probléme n'est pas Keynes ou pas Keynes, le probléme est Kuznets. Décrire le passé n'est absolument pas comprendre l'avenir et en réalite je vous le dis, toute notre économètrie fume la moquette. Tous les concepts de pib ou d'inflation sont très très discutables, mais malheureusement jamais discutés
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Merijn Knibbe Feb 14, 2018

I dear to differ. A new economics IS rising its head. Houses, existing houses that is, and land underlying houses have become much more prominent in economic analysis. On the asset side as well as on the liability side of balance sheets - the value of mortgages provided by banks has grown to a staggering 2/3 of the total value of assets owned by these banks. While they also, partly for the wrong reasons (rising prices), have become the mayor component of net and gross worth of households. This does get more attention - though I do have to admit that neoclassical macro economists who try to model this too often do not come up with concepts which enable a tight empirical relation between the balance sheets as we measure them and the attempts at a kind of balance sheet in these models. Balance sheets as such have of course gotten much more attention. Other aspects neglected by neoclassical macro were unemployment and public goods. Here, progress still has to be made. Or in fact, the regressioin of neoclassical economics has to be rolled back. Economists like Lucas and Prescott tried to role back the Keynesian revolution mainly by denying the concept of involuntary unemployment by introducing the 'representative consumer', or the idea that the entire society can be modelled as one person behaving like a homo economicus. But one Robinson Crusoë on an Island will never be unemployed. He might work a bit more or less, but that's, in the models, basically understood as a work-leisure trade off. Unemployment requires more people, and a monetary society with investment as well as consumption and government spending and where declines in consumption spending can lead to a negative feed back loop with investment spending - (in fact: especially) when wages are flexible. Re-introduce multiple persons in the model (to model a 4% unemployment rate you will need at least 25) as well as such feed back loops - and unemployment will return. This has not yet happened. When it comes to government spending: government production (safety, sewers, roads, education) is, in these models, too often defined as 'wasteful' which means that cutting on this kind of expenditure is, in the models, not a cost but will lead to more resources which are available for private consumption. Some models do not have this assumption but, as far as I know, the models of the ECB still assume that government spending is wasteful by definition. This has to change, too. And even the 'monetary' neoclassical models still assume a cashless society... Weird. Outside of these models, more and more attention is however paid to unemployment, money, balance sheets and land and houses.
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B Wilds Jan 27, 2018

Sadly, our system is geared at getting politicians re-elected and fulfilling the most pressing needs of today. Things like profit, greed, and quenching our unrelinquishing desire for growth is placed in front of longer-term issues and needs. Mapping out a logical and sustainable long-term plan requires delving into some rather hefty philosophical questions like what brings real happiness. More on this subject in the article below.

http://brucewilds.blogspot.com/2018/01/planning-sustainable-future-for-mankind.html
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Harlan Green Jan 22, 2018

The "radical uncertainties" that Keynesians didn't address had to do with record income inequality, as happened in 1929 prior to Great Depression. As FDR's man at the Fed, Marriner Eccles said at the time--a lack of "effective demand": "The United States economy is like a poker game where the chips have become concentrated in fewer and fewer hands, and where the other fellows can stay in the game only by borrowing. When their credit runs out the game will stop. The game stopped when players ran out of chips."
So it is really a case of history repeating itself, and new-Keynesians lacking ability to read history.
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Barry Rosenfeld Jan 22, 2018

I don't want to put words in the mouth of Dani Rodrik, but Skidelsky seems to be saying that economists are "hedgehogs" when they should be "foxes." A theory - the one big thing - that causes one to look the wrong way is a limited, if not poor, theory.

The real economic issue that Keynes uncovered is that of "uncertainty," which cannot be modeled because the distribution of events is unknown. Consequently, macro economists elided surreptitiously into "risk" as the relevant concept because it can be modeled. Unfortunately, Frank Knight, a contemporary of Keynes, also is now unread by the economics profession. Too bad. It is akin to economists looking at the sky to see if it is falling and falling into a chasm because they are looking the wrong way - because their "theories" are based on false assumptions about the nature of economic activity.

The "new" classicists, as well as the "new" Keynesians, seem to have ignored both Keynes and Knight - and Schumpy - as they go about theorizing based on assumptions that can facilitate mathematical modeling, although not based on the realities of economic systems. Economies are organic, implying a biological analogy in developing theory, e.g., survival of the fittest, capacity to evolve in response to changes in the technological and institutional environments. The false analogy to physics led to a path in which a mathematical solution was substituted for empirical reality. What a waste of intellectual resources.
- Jonathan London Feb 23, 2018
  
  Great points here
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Oreste Gallo Jan 22, 2018

Prof. Skidelsky,
is it a possibility that what would be needed is a radical rethinking of the approach taken? Wouldn't it be better to look at banking systems as a partnership between bankers and politicians, which include other groups depending on country and time, to extract rents from the rest of the community? Wouldn't it be more useful to analyse banking crises as rooted in the political systems?
Why Canada did not experience a banking crises while the US was the original source?
Regards,
Oreste Gallo
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Michael Parsons Jan 22, 2018

I suggest it is not that there is some failure in the basic Keynesian analysis of a need for a steady and high level of public investment etc. but that the private businessmen - especially 'globular ones' - have discovered how to head-off the elimination of the rentier and the socially-beneficial state control that would limit their external social cost; forewarned was forearmed. We are seeing the rule of Power over Truth, and the ways of power are not the ways of reason.
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David Punabantu Jan 22, 2018

Keynesian economics still lingers on. Take a look at the British budget. Do the maths. The British 2018 budget at £814 billion breaks down to £67.83 billion. Total GDP for 2018 estimated at £2029.8 billion. To collect £814 billion budget a extraction rate or tax of 3.34 percent per month would yield £67.83 billion per month or £814 billion per year. As taxes are above the 8 percent threshold, the government will collect the budget, spend it, re collect it, spend it, recollect it, spend it in a cyclical pattern many times in a single budget year. In effect it will be like Keynesian economics and the printing of money except instead of printing physically, the printing is done by recycling it, the budget. Taxes thus become compounded. Government tax at 30 percent in the first cyclical would extract that value leaving 70 percent. Then in the next cycle extract another 30 percent leaving 40 percent. The next 30 percent extraction in real terms is facing 40 percent left of the economy and in real value terms is 70 plus percent. Once all the value is extracted of savings, investments of ordinary people the whole nation government borrows against a "fiscal and economic crisis" ... Brexit I suppose.
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larry ripley Jan 22, 2018

Wow this is a hoot. I have to say it's no wonder that many shun economics. When one starts to read how the backward curve on the forward downslope and the forward advance of a negative economy always yields dislocations in the marketplace.

A moment of humor. I was impressed with "Marginalization of the Majority" and just stupefied at some other terms in these comments. I have a few observations from the past 35 or so years, many gleaned from close observations of what was going on and talking with people involved, not the top decision makers, but the people running and doing the actual work.

.I worked for the Dallas Reserve Bank from 1980 to 2002 and took the opportunity to learn in depth, as much as I had time for, about the Bank and its three primary functions. I got to know many officers and managers and numerous staff in the Economics and Banking Regulation Departments along with the folks in the Banking Services departments such as Securities, Wire Transfer, check processing and several others. I was in the IT Department hired to manage a large and complex IT project to develop a new Transfer of Securities system and Safekeeping for physical securities.

My first stage was to develop a set of data flows and the processes they entered or exited from. I had to work closely with the Securities staff at four different banks including the major hub of New York to develop a system to serve all twelve reserve Banks. In 1980, standards were not what they are today and each bank had developed their own software to handle the Securities functions and had built an exchange point in Culpeper Va. that switched and hooked the monstrosity together as well as Transfer of Funds, Check settlements, accounting settlements and more. Different Reserve Banks had bid on doing different replacement systems such as New York doing wire Transfer and Dallas doing Securities.

I was working in the Securities department studying activities during the first couple of years of the Reagan Administration and got to watch Reagan cut taxes and then raise them as the inflation rate never seemed to go down, but it did after wild ranging into double digits, 20% mortgage rates, a constant speculation by the wizards of Wall Street of what was going to happen. The Tax cut boondoggle left Reagan less than impressed with tax cuts as the end all, be all solution to everything and concluded it was Laffer's Folly. Despite the complete failure of tax cuts to do the job for Reagan, Republicans today still shrill about tax cuts and have no logic for how it is supposed to work. It's a one-trick pony, good for one economic situation and only marginally so.

I spent time running the Bank's Processing and Communications center and will testify the AT&T of Today is the direct descendant to the old Ma Bell, pre-1984. Don't ask me about net neutrality, because the FCC is the same damn Industry owned Agency it was 25 years ago. Sorry, I digress. I assumed the officers position responsible for Electronic Payments and began to visit Banks, Credit Unions and S&L. My call territory was centered in Lubbock which turned out to pretty much dead center for the upcoming closings of everything in that area, I knew a lot of those people and saw who the eventual survivors were and learned a lot by talking to them afterwards gleaning what I could of what had led to their downfall as a bank.

Until that time I had no idea how much deregulation was going to do to banking and the economy. After the tax rewrite which was for lafferites a big whiff. they got their rate cuts, but they were offset by the elimination of deductions to equal the tax cuts. Those were the proximate cause of the '89-'90 recession following the bank closings and softness in the housing and oil markets. The 80s had their time for the Time Share industry. The passive loss deduction allowed investors to claim operating losses incurred by Time Shares and oil drilling investments, two excellent methods of losing money without losing your investment. Paper losses were shared among the investors and written off their income taxes. Call it the Carried Interest of the 70s and 80s.

All this is to address the actions taken to resolve the recession. Congress attempted to do the minimum and directed the Federal Home Loan Bank to close S&Ls they had to but they were to sell the assets hopefully for enough to cover what they had to payout to depositors. It did not work out that way as the FHLB dumped the assets and did not come close to recovering cost. After some discussion Congress created the Resolution Trust Corporation and after several fits and starts hit upon a management scheme that was doable and kept all parties happy. Essentially the RTC took over the closing of banks and other financial institutions and disposition of the banks assets. The RTC sold the assets from their takeover making enough to cover their operational cost and payoff the depositors. The entire episode ended up costing Taxpayers 125 Billion for closing 747 banks and other financial institutions

I went and visited with the managers and workers at the Dallas office of the RTC. It was the best setup for dealing with multiple bank closings but it has not been used again. Why not? I know Hank Paulson expected them to break out the RTC but the Obama administration did not and we paid for it.

I've got to stop or I'll put everyone to sleep. So a couple of short observations:
1) Know what the hell is going on. Nobody had a good understanding of the 89-90 recession. Know what markets have failed and why.
2) The why should correctly explain the changes that occurred that unbalanced the market playing field. We're not going to have a financial crisis without an output market collapse. Legislation must be passed to correct the imbalances. Markets won't collapse if the playing field is level. That is the government's job.
3) The recovery of the failed market should be the priority. That requires changes to level the playing filed and funding to speed the recovery

From the '99-'00 recession: The market was the software market of DP and the losses were not to financial businesses. The investments were from Venture Capitalists rather than banks and financial institutions so the impact on the Finance industry was negligible. However the gigantic tax cut never stimulated the economy because the economy was already too sick. It was diffuse and never addressed the failed market

The response to the most recent recession is without question a failure of government to properly regulate the housing, mortgage and financial industries properly. Obama screwed the pooch when he put Geithner in Treasury.

I've not found any analysis that tracks through from DIDMCA 1980 to the present and comes out with any assessment of that worked or that didn't work. I think there are things that work and should be used like the RTC. I've seen no indication that anyone has studied the impact of one recession on the next.
A new reply to this comment has been posted.
larry ripley Jan 22, 2018

Wow this is a hoot. I have to say it's no wonder that many shun economics. When one starts to read how the backward curve on the forward downslope and the forward advance of a negative economy always yields dislocations in the marketplace.

A moment of humor. I was impressed with "Marginalization of the Majority" and just stupefied at some other terms in these comments. I have a few observations from the past 35 or so years, many gleaned from close observations of what was going on and talking with people involved, not the top decision makers, but the people running and doing the actual work.

.I worked for the Dallas Reserve Bank from 1980 to 2002 and took the opportunity to learn in depth, as much as I had time for, about the Bank and its three primary functions. I got to know many officers and managers and numerous staff in the Economics and Banking Regulation Departments along with the folks in the Banking Services departments such as Securities, Wire Transfer, check processing and several others. I was in the IT Department hired to manage a large and complex IT project to develop a new Transfer of Securities system and Safekeeping for physical securities.

My first stage was to develop a set of data flows and the processes they entered or exited from. I had to work closely with the Securities staff at four different banks including the major hub of New York to develop a system to serve all twelve reserve Banks. In 1980, standards were not what they are today and each bank had developed their own software to handle the Securities functions and had built an exchange point in Culpeper Va. that switched and hooked the monstrosity together as well as Transfer of Funds, Check settlements, accounting settlements and more. Different Reserve Banks had bid on doing different replacement systems such as New York doing wire Transfer and Dallas doing Securities.

I was working in the Securities department studying activities during the first couple of years of the Reagan Administration and got to watch Reagan cut taxes and then raise them as the inflation rate never seemed to go down, but it did after wild ranging into double digits, 20% mortgage rates, a constant speculation by the wizards of Wall Street of what was going to happen. The Tax cut boondoggle left Reagan less than impressed with tax cuts as the end all, be all solution to everything and concluded it was Laffer's Folly. Despite the complete failure of tax cuts to do the job for Reagan, Republicans today still shrill about tax cuts and have no logic for how it is supposed to work. It's a one-trick pony, good for one economic situation and only marginally so.

I spent time running the Bank's Processing and Communications center and will testify the AT&T of Today is the direct descendant to the old Ma Bell, pre-1984. Don't ask me about net neutrality, because the FCC is the same damn Industry owned Agency it was 25 years ago. Sorry, I digress. I assumed the officers position responsible for Electronic Payments and began to visit Banks, Credit Unions and S&L. My call territory was centered in Lubbock which turned out to pretty much dead center for the upcoming closings of everything in that area, I knew a lot of those people and saw who the eventual survivors were and learned a lot by talking to them afterwards gleaning what I could of what had led to their downfall as a bank.

Until that time I had no idea how much deregulation was going to do to banking and the economy. After the tax rewrite which was for lafferites a big whiff. they got their rate cuts, but they were offset by the elimination of deductions to equal the tax cuts. Those were the proximate cause of the '89-'90 recession following the bank closings and softness in the housing and oil markets. The 80s had their time for the Time Share industry. The passive loss deduction allowed investors to claim operating losses incurred by Time Shares and oil drilling investments, two excellent methods of losing money without losing your investment. Paper losses were shared among the investors and written off their income taxes. Call it the Carried Interest of the 70s and 80s.

All this is to address the actions taken to resolve the recession. Congress attempted to do the minimum and directed the Federal Home Loan Bank to close S&Ls they had to but they were to sell the assets hopefully for enough to cover what they had to payout to depositors. It did not work out that way as the FHLB dumped the assets and did not come close to recovering cost. After some discussion Congress created the Resolution Trust Corporation and after several fits and starts hit upon a management scheme that was doable and kept all parties happy. Essentially the RTC took over the closing of banks and other financial institutions and disposition of the banks assets. The RTC sold the assets from their takeover making enough to cover their operational cost and payoff the depositors. The entire episode ended up costing Taxpayers 125 Billion for closing 747 banks and other financial institutions

I went and visited with the managers and workers at the Dallas office of the RTC. It was the best setup for dealing with multiple bank closings but it has not been used again. Why not? I know Hank Paulson expected them to break out the RTC but the Obama administration did not and we paid for it.

I've got to stop or I'll put everyone to sleep. So a couple of short observations:
1) Know what the hell is going on. Nobody had a good understanding of the 89-90 recession. Know what markets have failed and why.
2) The why should correctly explain the changes that occurred that unbalanced the market playing field. We're not going to have a financial crisis without an output market collapse. Legislation must be passed to correct the imbalances. Markets won't collapse if the playing field is level. That is the government's job.
3) The recovery of the failed market should be the priority. That requires changes to level the playing filed and funding to speed the recovery

From the '99-'00 recession: The market was the software market of DP and the losses were not to financial businesses. The investments were from Venture Capitalists rather than banks and financial institutions so the impact on the Finance industry was negligible. However the gigantic tax cut never stimulated the economy because the economy was already too sick. It was diffuse and never addressed the failed market

The response to the most recent recession is without question a failure of government to properly regulate the housing, mortgage and financial industries properly. Obama screwed the pooch when he put Geithner in Treasury.

I've not found any analysis that tracks through from DIDMCA 1980 to the present and comes out with any assessment of that worked or that didn't work. I think there are things that work and should be used like the RTC. I've seen no indication that anyone has studied the impact of one recession on the next.
A new reply to this comment has been posted.
Ben Leet Jan 22, 2018

I looked at a Krugman article from 2008 where he examines the argument of E. Cary Brown that Keynesian fiscal stimulus was inadequate between 1933 and 1937 to counteract the downturn in output of the Great Depression (see the NYTimes article, and the graph -- https://krugman.blogs.nytimes.com/2008/11/08/new-deal-economics/). And beginning in 1938 FDR strongly applied fiscal stimulus, and "Robust growth resumed in the third quarter of 1938. The economy recorded a spectacular increase of 49 % in real GNP from 1938 to 1942 [12% per year], at which point economic output finally returned to its "normal" level -- that is, the point it would have reached had its pre-1929 growth rate continued over the follow thirteen years -- signifying full recovery from the Great Depression." Here I'm quoting from Michael Hiltzig's book The New Deal, pg. 392. The graph at the Krugman article shows this return to normal. It's very impressive. Actually the growth is spectacular after 1937. I'm also reading Thomas Palley's edited book "Restoring Shared Prosperity" of 2013, and many German orthodox economists are abandoning fiscal stimulus in 2009 and sending the European economy into prolonged recession. So fiscal policy is still the devil. I read Dean Baker's prediction of the Great Recession published in 2006, how the housing market was way out of line. Proving that some economists got it right. I don't know how Keynesians missed the trend, and hindsight shows that the "outstanding debt" of the "domestic financial sector" had about almost doubled as a % of GDP between 1996 and 2006, increasing from 74% of GDP to 120%. How economists could miss this event baffles me. Macro economics may rely theoretical uncertainty, but that may cloud the imbalances that plunged the economy, the principal drivers were clearly viewable.
- Barry Rosenfeld Jan 22, 2018
  
  Nothing "uncertain." Assume there are no cars. Cross the street is riskless; cross without looking. The only "uncertainty" in economics is to which inadequate theory to apply. This factor, almost seamlessly, can be traced with attention to confirmation bias, the refusal of the ego to admit error (Krugman blithely claims that they were looking the wrong way, not that his chosen theoretical model told him to look the wrong way), and just the inability to accept that the enormous time and effort expended in learning the wrong ways was a misallocation of one's most precious resource - time.
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E Walker Jan 21, 2018

Maybe one good step would be to add a new and never-berfore seen issue to economic analysis: widespread fraud and corruption.
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John Doyle Jan 21, 2018

There is of course a new economics 'out there' It's called MMT or better, Modern Monetary Mechanics.
It's not brand new. It goes back a good 60 years, but has struggled to overcome the academy of mainstream economics, from Chicago, Austria, etc. which has the ear of most politicians, academies and the MSM.
It shows up the falsehoods that underpin the mainstream versions, which don't work, as the Queen pointed out to the LSE. The mainstream cannot function without a whole train of assumptions whereas MMT starts with the Constitutions that are relatively similar across the nations. The constitution gives the national government ultimate power over the currency, to create it, to destroy it etc. The US dollar did not exist until the constitution ratified it. the nation cannot, except by design, go bankrupt in its own currency. The government can always pay its bills, its debts at any time and virtually forever - as long as there are resources for sale. It is not necessary to save or borrow its own currency.

The economic dysfunction due to poor economic theories such as monetarism and its baby, Austerity, are grossly distorting the welfare of the population. It is a complete nonsense and finally seemingly getting recognised as such. Even the arguments over the current accounts, the annual government budget, are rife with false conclusions via the mainstream. There are loud political voices over the evils of budget deficits and a constant stream of calls for surpluses. This is completely wrong headed but is mainstream gospel.
For currency to be injected into the economy the government has to spend. Spending creates the currency.
It has to spend more than it takes back in taxes, otherwise the economy goes backwards. The non government sector has to divert resources to balance the accounts. That reduces its resources and reduces employment opportunities, so it is counterproductive. And so on.
- Paul Friesen Jan 22, 2018
  
  I did try to read up on that at one time. Their "big idea" seemed to be the notion that, contrary to standard economic ideas, commercial banks are unable to create money. They think that only central banks can do that.
  
  I wrote a post on their website trying to explain how commercial banks do create money, but it just disappeared a short time later with no comment. Seems they are not interested in contrary views.
  - John Doyle Jan 22, 2018
    
    Are you talking about an MMT site or another? I asked Bill Mitchell about bank lending and he said they create assets. Either way [assets or credit] they USE government money. This is a way around the constitution which gives the government monopoly rights over its currency. Banks are licensed to operate.
    MMT's 'big idea" is to be real and not create false paradigms or assumptions about economics that the mainstream does. So for instance the Federal government can not go bankrupt in its own currency. That's not the mainstream view which has the government borrowing from banks and recycling taxes, therefore with limited money to spend. It is nonsense. For starters the money has to be created first. It gives to the population the money it needs to pay tax. ETC
    - Paul Friesen Jan 23, 2018
      
      I don't remember the site. It was just something that came up when I looked up MMT. It said quite a few things that made sense, but some that did not.
      
      I don't think you would find many mainstream economists who would tell you that a government that borrows only in its own currency can go bankrupt. Of course, as long as its printing press works, any government can pay any bill in its own currency. What will happen to the value of that currency if it over-does it can be another matter. And governments can and do effectively go bankrupt if they borrow in currencies they don't control.
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David Smith Jan 21, 2018

Why should there have been a new brand of economics emerging after the Great Recession? The causes of the Great Recession -- tax policies favoring the rich to the detriment of the rest, leading to overextension of credit fueling stock and housing booms which eventually went bust -- are much the same as those of the Great Depression. Keynesian economics was the answer then, and remains the answer today.

If the private sector is too discombobulated by the financial crashes, then the public sector should take up the slack with public works programs. What's so hard to understand about that? The problem with Keynesian economics is that the political sector embraces the stimulus part of it in hard times, but then refuses to comply with the Keynesian requirement of building fiscal surpluses in good times to pay for it, resulting in serial deficits in hard times, and a growing national debt.

If economists want to do something useful about preventing another meltdown, they should concentrate on the tax policies favoring the rich at the expense of the rest which leads to the overextension of credit, obligingly supplied by the rich (who are scooping up all the marbles) and needed by the rest, who need credit to fill the gap between their rising aspirations for consumption and stagnant wages. Such a condition is unsustainable as the machinery for growth, and will invariably produce "cascading defaults," a financial crisis and economic relapse.
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Per Kurowski Jan 21, 2018

“New Keynesian economists turned a blind eye to instabilities building up in the banking system, because their models told them that financial institutions could accurately price risk.”

They still turn a blind eye to the fact that when regulators introduced risk weighted capital requirements for banks that distorted entirely the possibilities for banks to accurately price risk.

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html
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Philip Ralli Jan 19, 2018

Maybe the answer to the question is that we don't yet know what 'the big goof' by the Central Bank was in the past decade (maybe there wasn't one!). One possibility is that the ZIRP policies to save banks and jobs will turn out in retrospect to have ruined pension funds at a critical demographic juncture. But the problem with pension fund problems is that they take a long time to appear... another possibility is that monetary inflation has been merely deferred by savers nearing retirement who have bought indexed world equities rather than consuming; when they will need to gradually sell these down to live, this could not only bring down indices but also light the fire of wage inflation which Central Banks may find harder than expected to counter since the money will already have been created. But again this will take time to be revealed.
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jagjeet sinha Jan 19, 2018

DEMOCRACY V ECONOMICS : THE TOKAIDO ENLIGHTENMENT
The limits to Economic Growth worldwide faces its litmus test with Democracy.
The Marginalized Majority used Democracy to oust The Establishment.
Economic Growth can no longer bypass the Marginalized Majority.
Brexit Trump Macron and Modi all need Inclusiveness to counter Inequality.
The Tokaido Corridor in Japan linked Tokyo to Osaka with Shinkansen.
Together the Twin MegaCities now are home to nearly 75% of Japan.
Absence of Economic Populism in Japan lies in Inclusiveness.
Britain's fascination with HS 1 & HS 2 perhaps replicating Tokaido.
The Canadian Tokaido Corridor connects Windsor to Quebec.
Economic Populism can be addressed with The Tokaido Enlightenment.
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Steve Hurst Jan 18, 2018

Robert, In the same way that the Bank of England regularly issues a highly dubious fan chart covering all eventualities ensuring they are always right, economists come from their own fan chart or spectrum of opinion meaning you are always ensured somebody somewhere has been right, by guess or by god. The problem is nobody has ever played the game this large or this interconnected (and therefore this interactive) and quite frankly the model(s) is not proven. What is proven is the short termism of government and banking and it is difficult to see that changing - and the conflict is between short and long term outlook
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Patrick Crowley Jan 18, 2018

It is not true that no macroeconomic work has been done on this last downturn. My work with Andrew Hughes Hallett has shown that we are experiencing a lengthening of the business cycle which comes with also a shift to greater amplitude cycles. This all started with the great moderation, and so unwittingly the "greats" are linked: without the "great moderation" we wouldn't have had the "great recession".

If you are interested you can read more on my Econoblog at http://patrickmcrowley.blogspot.com/2017/12/why-is-business-cycle-elongating.html
- Scott Paterson Jan 19, 2018
  
  Thank-You for the concept of cycle elongation and the webpage reference. I will follow your most interesting blog.
  
  I will read your article this afternoon and get back to you. I'm wondering how elongation skews economic indicators. Instead of dieting I'm considering elongating the absolute value of the pound.
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Scott Paterson Jan 18, 2018

Thank-You Robert Skidelsky for your critical review of Paul Krugman's essay 'Good Enough For Government'. You have to forgive Paul, he's still trying out for the role of Secretary of the Treasury even though his darling lost a year ago - he auditions in public using his mid-twentieth century technological tools of micro vs macro; if the audition fails I understand he plans on becoming the Surgeon General by performing on the Venice, CA boardwalk juggling bone chisels and hacksaws.

Here are your tools for the economy of the twenty-first century. First tool - think of economics as analogous to Federalism in government paradigms in that it applies to three levels: the economy of the self, the way one is tied in to the economy, and the overall system.

Second, third, and fourth tools - let's use Thomas Pikkety's two Fundamental Laws of Capital to explain and correct for the Fundamental Force for Divergence. Indulge me my explanation.

First forgive the frivolities, I'm American. Every presidential election season there is the sideshow of which economist shall prevail in the cable news television world between two men I find physically and intellectually indistinguishable: Krugman and Robert Reich; sort of like little people wrestling night at the PC Bar. The more I read them the more I see they are underserving their community because they serve a small sector at best.

Yet I hang on every word they speak as if my life depends on it. That's because my first read of things economic are always visceral. I read Skidelsky and Krugman three times each to focus on the multitiered aspect of economics that is our first tool. I have an economy of scale and I question how new information relates to this in my second reading - I am less overtly hostile to the information and seek to apply new information to my network of understanding.

But ahh! The third reading is the charm. I look at the economist's ideas and say who do these ideas really serve and how can we improve things so the underserved are acknowledged and their economic needs are met? Krugman's third reading leaves me with the taste of copper in my mouth.

Let's get back to the tools I borrow from Pikkety's tome 'Capital in the Twenty-First Century', remembering that I have gone through them with multitiered skepticism. I start with the Fundamental Force of Divergence because this the most glaring shortcoming of macroeconomist clown posse that Krugman references: Ben Berneke, Larry Summers, himself, and the others. When the rate of return on capital investment is greater than the growth of the economy a divergence of wealth occurs between the haves and have nots. Pikkety assigns the equation r > g to denote this. More on this later.

Perhaps the most glaring example of the shortcomings of the Obama presidency was his use and advocacy of meritocracy. Summers was the most qualified for his many positions in the Obama Administration and he and Obama must be commended for mitigating the Great Recession as you are calling it. Things got better for the banks and the wealthy, but for the rest of us. The wrestling match micro vs macro; macro vs macro is an elitist's sideshow that has no relevance to the economic well being of the rest of us because it cannot see and does not measure the yawning gap between the haves and have nots.

I introduce the Second Fundamental Law of Capital first because after a little math it points to what causes economic growth, which is the main goal of most economists. Growth equals the savings rate divided by the capital / income ratio, a measure of capital assets divided by national income which I'll explain in a moment, expressed as a percentage. The buzz word is savings which is important for economic growth. The equation is beta equals sigma divided by the growth of the economy or B = s / g and I used algebra to isolate growth in g = s / B.

The First Fundamental Law of Capital needs a little explanation and gives me another chance to point out the shortcoming in the analyses of macro economists. Krugman, Friedman, and the rest are using GDP as the basis of their work and it is a deeply flawed measurement. Think of this: a measurement of GDP, the goods domestically produced does not include the costs incurred with capitalization; the wages paid to workers, wear and tear on the building and other infrastructure overhead, and the cost of borrowing money. Pikkety substitutes the concept of national income and it regularly comes in at ten percent lower than the GDP. The important thing to note is that national income is the same thing that capitalists have been doing on their income taxes by itemizing deductions. Pikkety uses tax records to do an analysis that is documented with hundreds of years of evidence. He documents the rates of growth as compared to the rate of return of capital investment.

And all of that is for this startling statistic. The most violent conflagrations in recent world history, the Belle Epoch (think Napoleon), WW I and WW II correspond to the widest gaps of r > g , rates of return on capital investment larger than growth of the economy. All of those meritocracy experts and professional economists have ignored this and the gap between the haves and have nots is wider than it has ever been. Don't you think that's an important thing?

It's time for a fundamental redistribution of wealth in the form of long term savings accounts for every American adult. This can easily be done at little or no pain to 99.99% of us. All of the social programs discussed in the Presidential primary of 2016 as well as a salary of $50,000 could be paid for on a ten percent tax on the tangible and intangible assets of .01% of us who are the wealthiest. If they want to try to expatriate in order to avoid taxes we simply anoint all the wealthy actors in the economy as citizens if they want to participate in the economy, or visit, or rely on the courts for jurisdiction.

Remember the Occupy movement? And the 99% slogan "We are the 99%? That was inspired by Pikkety who denoted that the majority of the economy is owned and / or controlled by one percent of the population. When I heard that I ran out and bought a copy, the second printing. In the preface Pikkety says that he was wrong to claim that one percent own most of the economy. He said that it's more like one one hundredth of a percent that own everything.

Thanks Robert Skidelskey. I enjoy the irony in your subtitle: the Great Depression begat Keynes; the stagflation surrounding the Oil crisis years begat Friedman; Friedman's mantra of monetarism and fewer banking regulations begat the Great Recession. Wonder what the next macroeconomist who ascends the throne of power will beget?
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Paul Friesen Jan 18, 2018

I think no new theory has emerged because none is needed. It might be nice to be able to predict crises in advance, but they are a lot like earthquakes. You can see and even potentially measure the stresses building, but knowing when they will let go is another matter. Right now, anyone with a bit of common sense can see the stresses building in the stock market, but knowing when the collapse will come is hard. A few weeks ago, anyone sensible could have predicted the collapse of bitcoin, but only now can we say when.

It is unlikely that we will do much better at predicting these things any time soon, if ever. The important thing is knowing how to deal with them when they happen. There is absolutely no need for them to cause massive unemployment for a long time. If there is unemployment, all that is needed is to create money and put it in the hands of people and businesses who will spend it. Monetary policy can usually do that, but if interest rates hit the zero lower bound, we need fiscal policy. Simple. But still not understood.
- Scott Paterson Jan 18, 2018
  
  Hi Paul. I like your comment but disagree.
  
  I find these forums are more fun if we interact.
  
  I like your analogy to earthquake prediction. You know that Mexico the city is atop a resonating subfloor and that an early detection warning saves hundreds of lives every year. On the tenth anniversary of the great earthquake the early warning system saved thousands of lives.On the date of the actual quake my T.A. was rushing to his class on the university campus when he saw the building fall down.
  
  Similarly the early warning system of having Paul Krugman as the voice of authority on a Hillary Clinton Administration sent the progressives to seek shelter in bars along with Jill Stein and caused the disenfranchised to seek shelter at their polling places as well.
  
  We don't have to predict we have to prevent.
  - Paul Friesen Jan 19, 2018
    
    Some prevention is certainly more possible than prediction. Good bank regulation can certainly go a long way. Here in Canada, people used to complain about stodgy, over-regulated banks that were unable to participate in all those fantastic, innovative ideas creating tremendous wealth out of thin air until the financial crisis hit and we suddenly had a banking system that was the envy of much of the world.
    
    But memories are short and people are people. Already, regulations put in place after the crisis are under attack. There will be another crisis sometime either because regulations have been loosened too much or because somebody came up with something to get around them that should have been regulated and wasn't.
    
    We need to be able to deal with such crises. It would not be hard to do if people in authority understood how the economy works, but very few of them give any evidence of understanding properly.
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Douglas Jackson Jan 18, 2018

As a non-economist, it seems to me that the next claimed “big new idea” on the horizon is ABMs. Everyone lately seems to be lining up to decry the oversimplification inherent in models based on “representative agents”. Simulations starting with adroitly conceived heterogenous agents are held to be superior for modeling complex systems characterized by computational irreducibility, emergent phenomena and radical uncertainty.

If ABMs are the next bandwagon, however, there is an inherent absurdity in using them to inform the discretionary interventions of policy makers - who as agents themselves reserve their prerogative to not be bound by any rules/heuristics. As with all previous approaches, enormous exertions will still be undertaken to marshal and analyze data for the purpose of divining the actions and intentions of a diverse cohort of economic actors in order to determine discretionary monetary policies. So all of this (aggregated, and therefore lost) nuance then informs policies the implementation of which requires manipulation of a few giant levers – policy rates, central bank balance sheet size and composition. Moreover, this cycle of intervention will still entail significant latency and massive reflexivity.

I propose the better approach is what could be called Direct Agent Empowered Modulation (DAEMON?) whereby an innumerable host of economic actors all wield their own tiny levers, in real time, to meter money supply and interest rates. The system I’ve built is designed to enable this automated self-adjustment.
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Gerald Silverberg Jan 18, 2018

And all the camps neglect the structural developments that promoted instability: rising inequality, international imbalances, and the resulting rise in debt and financial leverage.

Uncertainty alone is not the explanation. Without models that admit multiple equilibria, you cannot really understand a modern economy or financial system (viz bank runs, which derive from perfectly rational behaviour).

But both fresh and saltwater modeling is based on unique equilibrium methods.
- Scott Paterson Jan 18, 2018
  
  I like your post Gerald Silverberg but there is a third way of economic analysis in class struggle.
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