Brad Delong on the Austrian School

Brad

From his blog here.

Brad wrote:

Let me give eight propositions that I think of as "Austrian," meaning that they have been maintained by some "Austrian" somewhere and somehow, and assess them:

(1) IF THE FEDERAL RESERVE HAD FOLLOWED A "SOUND" MONETARY POLICY--"SOUND" MEANING THAT IT SHRANK THE STOCK OF HIGH-POWERED MONEY AT THE SUM OF THE TREND GROWTH RATES OF THE INSIDE MONEY MULTIPLIER AND OF VELOCITY--THEN WE WOULD NOT HAVE FINANCIAL CRISIS OR BIG RECESSIONS.

Status: FALSE. Requiring trend deflation at the rate of labor force and labor productivity growth in order to keep nominal spending without a trend would be more likely to generate waves of universal bankruptcy, deep financial crises, and big recessions than our current system.

(2) SPECULATION AND LACK OF PRUDENCE IN FINANCIAL MARKETS LED TO OVERBUILDING IN HOUSING IN THE MID-2000S.

Status. TRUE.

(3) OUR ONLY SIGNIFICANT PROBLEM IS GOVERNMENT: IT WAS FECKLESS AND OVEREXPANSIONARY GOVERNMENT POLICY LED TO THE SPECULATION AND THE BUBBLE THAT CREATED THE PROBLEM.

Status. FALSE. It is certainly the case that sufficiently austere policy can keep any bubble from ever arising, but the costs of such policy are high. And periods in which monetary policy is overexpansionary are periods in which households, feeling flush, expand their consumption spending and create consumer price inflation. There was no wave of rising consumer price inflation in the 2000s.

(4) OUR ONLY SIGNIFICANT PROBLEM IS GOVERNMENT: IT WAS GOVERNMENT GUARANTEES OF FANNIE, FREDDIE, OF COMMERCIAL BANKS, AND OF TOO-BIG-TO-FAIL UNIVERSAL BANKS THAT WERE THE ONLY SIGNIFICANT CAUSES OF OUR CURRENT PROBLEMS.

Status: FALSE. We had financial crises and recessions like this long before we had FANNIE, FREDDIE, or commercial bank deposit insurance. And the princes of Wall Street and the shareholders of our universal banks now all wish that they had emulated Jamie Dimond and Lloyd Blankfein and gone short the subprime mortgage market in 2006. "Heads we win--tails the government pays" was not in the forefront of the minds of those whose wealth was invested in the bank stocks that have still lost much more than half their value since the summer of 2007.

(5) BECAUSE OF OVERBUILDING IN HOUSING, WE WERE DOOMED TO HAVE A PERIOD OF HIGH UNEMPLOYMENT AS THE ECONOMY REBALANCED ITSELF AND TRANSFERRED RESOURCES OUT OF THE HOUSING CONSTRUCTION SECTOR.

Status: FALSE. There is generally no period of high unemployment when resources are transferred out of consumption-producing sectors into investment goods-producing sectors. There is no necessity that the transfer of resources out of investment goods-producing sectors be accompanied by high unemployment. The business of shifting resources between sectors is pretty much orthogonal to the business of maintaining near full-employment and proper capacity utilization. Indeed, high unemployment and low capacity utilization are much more obstacles than aids to sectoral readjustment and reallocation: how can the market figure out where resources have their best economic use when no use produces a profit on the market?

(6) OUR CURRENT PROBLEMS ARE THE RESULT OF THE NEED TO TRANSFER RESOURCES OUT OF HOUSING CONSTRUCTION AND RESTORE TREND GROWTH EQUILIBRIUM BETWEEN THE SECTORS.

Status: FALSE. The housing sector adjustment is over. We are now back to trend in the number of houses. And we are well below trend in new houses being built. If this period of depressed economic activity were primarily a way of transferring resources out of housing construction and shrinking the housing capital stock and the house-building industry back to its sustainable long-run trend size, the period of depressed economic activity would be over.

(7) EXPANSIONARY MONETARY POLICY IS UNWARRANTED BECAUSE IT WILL ONLY BOOST SHORT-TERM EMPLOYMENT IF IT WILL ONLY LEAD TO ANOTHER BOUT OF ASSET PRICE INFLATION AND A BIGGER RECESSION DOWN THE ROAD.

Status: FALSE. See "crying 'Fire! Fire!' in Noah's Flood..."

(8) EXPANSIONARY FISCAL POLICY IS UNWARRANTED BECAUSE IT WILL ONLY BOOST SHORT-TERM EMPLOYMENT IF IT LEADS TO ANOTHER BOUT OF ASSET PRICE INFLATION AND A BIGGER RECESSION DOWN THE ROAD.

Status: FALSE. See "crying 'Fire! Fire!' in Noah's Flood..."

In general, exercises like this are much more fruitful if they are applied not to a vague concept--an "Austrian"--but to a living, breathing articulate example of Economicus Danuviensis...

BESman

(5) BECAUSE OF OVERBUILDING IN HOUSING, WE WERE DOOMED TO HAVE A PERIOD OF HIGH UNEMPLOYMENT AS THE ECONOMY REBALANCED ITSELF AND TRANSFERRED RESOURCES OUT OF THE HOUSING CONSTRUCTION SECTOR.

Surely there is an element of truth and sense to this statement.

Why?

BESman

Asset price bubbles resulted in oversupply and overemployment in one sector. Once the bubble burst what do you get? A period of high unemployment as the economy rebalanced itself. You have a high number of people in one sector who are now jobless and and must either remain jobless or be transferred somewhere else within the economy.

The reply given in the blog is sketchy, "there is generally" and "pretty much orthagonal" are not concrete in my estimation.

Flamed Diving

BESman wrote: »

"there is generally" and "pretty much orthagonal" are not concrete in my estimation.

:pac:

BESman

You didn't pick up on not concrete....:p

Flamed Diving

BESman wrote: »

You didn't pick up on not concrete....:p

But your statement was concrete, surely? :P


Anywhoo, it's pointless. Carry on.

BESman

Well I was kind of attempting a play on words with construction industry and what not.

So yes, no? Austrians completely wrong on this point??

Flamed Diving

BESman wrote: »

Well I was kind of attempting a play on words with construction industry and what not.

So yes, no? Austrians completely wrong on this point??

No, while it is too general a statement to get any satisfactory consensus on, I reckon their has to be some period/level of unemployment in an industry, once a certain level of oversupply has been reached, and especially if it this oversupply is imposed by a fall in demand. But how much unemployment? How much oversupply is required to reach this? What if the construction sector makes up a smaller ratio of the economy than is usual? What if the majority if construction workers are migratory labour, like in some Middle East countries?

I just think the statement is too simple.

BESman

Construction workers are migratory labour in this country even, just from observation, with many construction workers more likely to emigrate than other sectors. So I think this is an important point which weakens the Austrian argument. Perhaps they exclude this factor.

SLUSK

There was no wave of rising consumer price inflation in the 2000s.

Does anyone honestly believe this is the case? How much do you pay for petrol now compared to 10 years ago?

How much do you pay for food now compared to 10 years ago?

How much do you pay for electricity compared to 10 years ago?

I can go on and on.

Pop some data up there slusk, for the US and Ireland.

SLUSK

Deleted User wrote: »

Pop some data up there slusk, for the US and Ireland.

You can check here.
http://www.bls.gov/cpi/

If you look at the "average" cpi it does not look that bad, but that is probably mostly because the prices of consumer electronics and other stuff you rarely buy keeps going down while stuff you need in your daily life such as electricity, petrol, food and so on goes up alot.

It is in governments best interest to fudge the inflation data so it looks lower than it actually is.

I am from Sweden and here the prices of electricity has tripled in 10 years. The price of petrol has increased roughly 22%. I don't have the exact data for food stuff but most people I know reckons it has increased about 50% in 10 years.

Petrol and electricity (here at least) are not set by the market but pretty much by the government because of subsidies and taxes.

I would like to see explicit food prices over the last decade.

SLUSK

Deleted User wrote: »

Petrol and electricity (here at least) are not set by the market but pretty much by the government because of subsidies and taxes.

I would like to see explicit food prices over the last decade.

This seems to be a global food price index.
http://www.fao.org/worldfoodsituation/FoodPricesIndex/en/

Tricity Bendix

Deleted User wrote: »

I would like to see explicit food prices over the last decade.

Tsk tsk. Should of taken Food Markets in final year.