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It's a pretty sure bet the end of the world is nigh.

I, for one, welcome our new econo-overlords.

5 Responses to “When Professors write rap songs”

  1. Curious

    Funny video, but it raises an interesting issue.

    As I understand it Austrian economists contend that both governments and distorted markets are unlikely to efficiently allocate/use resources? An obvious example could be Ireland where massive quantites of labour and financial capital were poured into construction & housebuilding, to what now appears to have been to the general detriment of society. The distorting factors in this case include ECB interest rates, tax breaks on property investment etc.

    Anyway,now I hear Brian Lenihan championing the success of a car scrapage scheme which subsidised new purchases(Primetime on 30/3) as evidence that the economy is improving. Is this not exactly the same premise that caused the crisis, namely non-market forces (in this case primarily government policy) sucking resources into areas they wouldn’t go under free market conditions?

    One thing I’ve never understood of Keynesian economics, (and the Government’s policies over the last number of years), is the failure to take into account the opportunity cost of allocating scarce resources by inefficient means. To go back to the car scrapage scheme, if people aren’t willing to buy cars at cars at current prices, that indicates that at present they don’t feel its a good use of their limited supply of money. If you consider that the government’s money is our money (i.e. society’s money), the question arises ‘why should the government spend public money subsidising a purchase somebody wouldn’t be willing to make with their own money’?

    The key point is that that money will be used for something else if it’s not spent on a car that the owner didn’t even consider worth the real cost (the combined cost bourne by the government and purchaser). Most likely the money will be invested in a bank a/c in the short term, and the bank will allocate that money to be lent out to somebody else to buy something they consider worthy of its purchase price (house, factory, whatever).

    At this point I expect somebody is planning to reply with a description of the multiplier effect of government spending. I do see that in a situation such as what we’ve experienced since Sept 08 theres a significant risk of a ‘death spiral’ where the private sector would be likely to wait too long to start re utilising resources, causing major societal problems.

    My point is getting a bit drawn out here, but what I’d really like to know is why I don’t hear Keynesian economists talking about the need to utilise resources efficiently as the long term cure for our current problems? As far as I can see it seems acceptable to arbitrarily throw money into the economy, with little consideration for where the money would likely be diverted to in a properly functioning system (i.e. what consumers/businesses would spend their money on given the choice).

  2. stephen Kinsella

    Hi Curious,

    Thanks for your comment--Austrian economics is something I know a little about, having spent most of my time in Keynesian and Post-Keynesian pastures. The biggest difference between Keynesian schemes and other Austrian measures, when there is a difference at all, is in the short run. So a Keynesian will go for a balls-out pump priming of the economy through public works and scrapage schemes and so forth for a year or two, while an Austrian economist would say no, you're messing with the system, let prices take care of most of the adjustment, *but*, don't mess with the system when things are doing well, either.

    Keynesian policies (but maybe not the policies of Keynes-he's not his followers) are for extreme times, and ideally these stimuli are paid for via countercyclical fiscal policies rather than borrowing.

    For me, the Austrian approach wouldn't work because, with an economy running in historical time, the adjustment being carried through the price mechanism is really too much to bear, especially in a small open economy with no monetary policy channel to do some of that adjustment through.

    A Keynesian response would be that, for the Austrian price adjustment story to hold, you'd need to have a hands-off government throughout a fair few business cycles to iron out all of the demand-management features of the economy, as well as automatic stabilisers and the like. But we know that once in place, these supports are very hard to remove, so the real politick maybe simply to put up with whatever supports are there, and thus invalidate the Austrian story.

    Again though, we're talking chalk and cheese in our case, because, were there no state-interventions in the property markets and money markets, there never would have been as big a bubble to burst. Also, the long-term aspects of the economy's transition back to trend growth would have been taken care of, I guess, by the same mechanism?

    Let me know if that makes any sense!

  3. Curious

    Hi Stephen, after reading your response I’d definitely concur that it wouldn’t be realistic to blindly follow Austrian doctrine and take a severe ‘undamped’ price adjustment. And realistically the real world might be too complex to rigidly adhere to any strand of economic doctrine as government policy for any significant period.

    However while I don’t want to take this into too much of a political argument, I would just be fearful of how stimulus investment will be directed by the current administration. In my opinion ‘cosy crony capitalism’ was significant factor in Ireland’s recent problems. Giving the government a mandate to borrow and subsequently stimulate/spend their way out of the recession basically gives leeway to bend the rules and cater to the next group of vested interests that succeeds in bending the politician’s ears.

    To be fair there has been plenty of debate recently about the effectiveness of bailing out Anglo given the scale of upfront cash required by the state. I feel strongly that as a nation, and as individual economic & political observers, we need to continue casting a suspicious eye on the direction the government’s stimulus plans take.

    NAMA etc is basically a leveraged bet on future growth that requires the economy to return to growth/output/tax take increases of a few % a year and significantly higher levels of employment. Assuming that happens it should provide a reasonable, if imperfect, solution to a messy situation.

    I’d be interested to hear people’s opinions & predictions, how much faith do they have that both the government and Irish society in general, are capable of fostering the necessary conditions for a recovery to be successful? Personally I wouldn't subscribe to some of the extreme sovereign default type theories; however at the moment I could plausibly see in say 3-5 years time a scenario where unemployment is in the 8-9% range, GDP growth is 1%/year max.

  4. Stephen

    Hi Curious,
    I'd be of more or less the same opinion--we won't default, no matter the cost to the taxpayer in the future, and we won't see a return to solid growth levels for some time, unfortunately--there won't really be much of a stimulus plan (beyond NAMA) for the real economy, and there certainly won't be a NAMA 2.0 for the residential debt mountain about to collapse.

  5. Stephen

    Hi Curious, have you seen this explosion of Austrian debate online following Krugman's post? http://bit.ly/cW3ZXT

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