20 ms·

Advanced economies are so sick we need a new way to think about them

147 points by Amorymeltzer 11y ago

bigethan 11y ago
Related: http://www.nytimes.com/2015/11/01/upshot/is-the-economy-really-in-trouble.html http://www.nytimes.com/2015/11/01/upshot/is-the-economy-real... (plus a great gif in the header) When economists are unsure what exactly is going on, what does that mean? There's the quote by Buffet, "Be fearful when others are greedy and greedy when others are fearful". What should one do when others have no idea what's going on?
- yoyar 11y ago
  What one should do, if one was a politician with the power to do so, is less.
- rushabh 11y ago
  I think we are witnessing a massive de-centralization of economics. We seem to live in multi-tiered cellular societies that seem decoupled from one another. People living in the same city are experience vastly different trends with some are struggling, some are prospering. Like how small startups are able to create value that usually needed large corporate structures, small trends are becoming powerful and independent. People are getting news from a large variety of sources and living in their own bubbles. The new normal is that there is no normal. Those who are fearful and greedy are both right, but they no longer reside in the same world.
- mikeash 11y ago
  Extrapolating from Buffet's advice, the thing to do when others are uncertain and don't know what's going would be to be extremely certain and know precisely what's going on! Accomplishing this is left as an exercise for the reader.
- anigbrowl 11y ago
  I've gotten quite interested in EO Wilson's social biology approach.
caseysoftware 11y ago
"Standard new Keynesian macroeconomics essentially abstracts away from most of what is important in macroeconomics." Yes, that has been the criticism for decades. There is nothing new here. The only time Keynesian economics has "fixed" an economy was WW2 when we (the US, specifically) had full employment because of the draft and all of our competition had been literally flattened and/or killed. For another look at it, check out the Keynes vs Hayek rap battle: https://www.youtube.com/watch?v=GTQnarzmTOc https://www.youtube.com/watch?v=GTQnarzmTOc
- astazangasta 11y ago
  Don't watch that rap battle, hayek's insights are surely worse than Keynes. At least we can attribute one repaired economy to Keynes, we can attribute zero to Hayek. In addition, while Keynes may not help us resume prior output, he at least gives us some way to recover from recessions. Hayek's given us nothing, unless you're one of those people who thinks "The Road to Serfdom" is a good book.
  - xlm1717 11y ago
    We could have been following any economic ideology and recovered strongly post-war, for the reason caseysoftware gave. We can attribute zero to Hayek because the Keynesians have been running the economy for decades.
    - Mikeb85 11y ago
      > We can attribute zero to Hayek because the Keynesians have been running the economy for decades. No we can attribute zero to Hayek because he had no notable macroeconomic insights. Most of his work was related to the business cycle, investment and choice (ie. microeconomics).
  - sbuttgereit 11y ago
    First: watch the rap battle. Avoiding (or urging the avoiding) of contrarian ideas is how you perpetuate ignorance. If Keynes is worth is weight in stimulus, he'll be able to withstand the counter argument and win the day: if not, then there's even greater reason to see other perspectives. Sorry, but not buying your argument. If anything we can attribute a greater length of the Great Depression to the Keynesian inspired policies, not a repair (assuming that is the "fixed" economy attributed to Keynes). For some reference on this consider: http://newsroom.ucla.edu/releases/FDR-s-Policies-Prolonged-Depression-5409 http://newsroom.ucla.edu/releases/FDR-s-Policies-Prolonged-D... WW II ended the Depression insofar as its impact on employment, but it also destroyed (literally) massive amounts of accumulated capital. Global quality of life was greatly reduced: a failure by any rational standard. I suspect the necessary economic restructuring for war, and the later return to a peacetime economy, has much more to do with the repair of the economy that anything Keynes ever conjured. Later we have substantial numbers of completely unimpressive Keynesianesque experiments, including our own current "recovery". For Hayek (or similar) you are correct: there are really no instances of his policies repairing an economy... but could you tell me how many times approaches like his have been tried? There's some argument for the Depression of 1920, but on the whole reduction in Government intervention during an economic downturn is just not how bureaucrats roll. So I count no attempts. To suggest there are no Hayekian successes because Hayek fails is simply deeply flawed thinking; there are no successes simply because those approaches have never been tried. I think the closest you can see are in certain emerging economies where, at first, no one cares to regulate because there is nothing of worth there from a political power point of view (e.g. early Hong Kong, much of the early U.S. even). And yes, I do consider the "Road to Serfdom" a good book :-)
AngrySkillzz 11y ago
Wouldn't a simpler hypothesis be that output trends before a recession are artificially high? We know fairly well that economic trends tend to feed back on themselves; the idea that growth leads to an acceleration of growth which overreaches and ends in a crash isn't particularly far-fetched.
- JamesBarney 11y ago
  The problem is its very hard to tell a plausible sounding about what over artificially high production looks like. If you lived in an island economy and went from producing 100 widgets to producing 95. What exactly is artificial about the extra 5 widgets you supplied? You could argue that people were incentivized to work harder than they actually wanted to work but then you find a wage increase as we entered the recession. You could argue that technology got worse. But that's really strange because it doesn't seem like in 2008 we forgot how to efficiently make things. So that leaves the story Larry Summers is talking about.
  - AngrySkillzz 11y ago
    I'm talking about what you might call "artificial demand," not capability. Example: our corporate customers decided to buy 5 more widgets in 2007 than in 2008 because they saw the economy improving, mostly due to the growth of household on-paper wealth and the associated increase in consumer spending, and were forecasting a growth in their own business. When the housing market collapsed and consumer spending fell off a cliff, those customers no longer had any reason to buy the extra widgets. In that way, you can say output is artificial. A large mass of people spending above their means because of a perceived increase in wealth, along with other psychological factors, leads to an economy with rising demand. When it turns out that wealth increase was a phantom and those psychological factors disappear, there is less demand for widgets and thus output decreases. Output isn't "how much we can make," it's "how much we DO make." The amount we produce is proportional to the demand for that product.
    - ddingus 11y ago
      >>>... Additionally, the pain of correction can lead to a dampening in overall demand compared to what it was before. I went through a scenario much like this. Company had a single customer that is dominant, and that customer was over optimistic about the level of demand it was seeing from it's marketplace. Orders grew to large levels, company expands, etc... Then reality hits. That customer has a ton of inventory and wants relief! Worse, they could just order nothing and do a sell off for a time to recover, but that may destroy a valued partner, who didn't really do anything wrong, other than supply what they could have seen as too much. Long term, that is expensive for them as they would lose a valuable part of their product line. The solution ended up being sharing the problem with both parties running very lean while inventory levels drop. Now, coming out the other side, both parties are far more conservative. Risks are seen as bigger than they really are, and overall run rate business just isn't what it should be based on the data from before. Inventory, sales, and some other data is more closely tracked to answer the questions of "what DO we make?", and "Will it sell?" by both parties, who share the impacts of those answers. Hysteresis, in the sense being talked about here, could arise from artifacts of an event like this. When things were running high, expansion came either at the expense of capital held by the company, or debt, and both of those have impacts on the risk appetite of the business. It's all moderated now. That moderation is both real, in terms of hard data, cash, etc... and human, in that raw fear of another instability causing everyone to lose gains had since that last one... It's been an interesting journey. The reality is a took a very considerable time to reach a point where meaningful risks make sense again. About two years. This, despite the problem itself resolved within 6 - 8 months. Turns out, the motivation to take some new risks and make reasonable investments is being driven by a slight downward trend in sales. It's not much, but it's not growth. The additional "hysteresis" impact appears to be felt through the marketplace. That big event seemed to dampen way more than one would expect at first glance. I believe that slight trend is the change in risk / value perception as well as the market seeing the brand fluctuate and that resulting in a loss of confidence, or a crack where competing brands gained some ground. This is hard to resolve though. There isn't enough data. I've made some changes in marketing in an attempt to get it, and or just correct for the trend in an obvious, measured way. Jury is still out on that. Having production satisfy demand is very important in the vast majority of cases. Overproduction either tends to create instability, or a reduction in value as too much is out there, or high inventory costs that tend to marginalize the value of an overproduction event. Exceptions can be, say an overproduction to insure supply during a planned downtime, or expansion, but that can be expensive money and resource availability...
nemo 11y ago
Larry may be right on some points, but given his past support for and architecting of deregulation of the U.S financial system (including the repeal of the Glass-Steagall Act) while he was in the Clinton admin., along with support for the disastrous privatization of the economies of the Post-Soviet states that's lead to massive human suffering and political failure, as well as gambling with Harvard's endowment and losing the school $1.8 billion, triggering layoffs and budget slashing, I think we'd do well to find advice from those with a less predictable and disastrous track record.
- alienjr 11y ago
  "support for the disastrous privatization of the economies of the Post-Soviet states that's lead to massive human suffering" Lack of privatization in Post-Soviet states lead to massive human suffering. In Poland the government constantly subsidies all companies that weren't privitzed in 90s. What's worse quality of products and services in these industries is terrible. That's why for instance electricity in Poland is one of the most expensive in Europe. And it is impossible to change anything because all these companies are highly unionized and have huge political influences during elections. Little state ownership may work fine in countries that has different culture in rest of the economy has been capitalistic for last 200 years. In Post-Soviet world it is disastrous. Look at Russia for intance - Gazprom and other state companies were overtaken by the Putin's mafia.
  - RobertoG 11y ago
    "Gazprom and other state companies were overtaken by the Putin's mafia" That is called "privatization".
    - jahewson 11y ago
      Sort of. The Russian government still owns a majority stake in Gazprom and Putin's conquests have been under the banner of moving corrupt private oil companies back into the public hands of Gazprom. So it's really a landgrab by the state, which happens to own a private company. But it was the US's policy of rapid "shock" privatisation which resulted in the unmanaged sell-off of the original state assets in the 1990s and the creation of those oligarchs. It's like selling USPS for $1m - that's not privatisation, it's madness.
youngtaff 11y ago
Perhaps instead of giving cheap money to the banks so they can make a profit at our expense, we could give the money to the people so they can use it the 'best' way for them (save, spend, pay off debt etc)
- fche 11y ago
  ... or how about "none of the above".
  - littletimmy 11y ago
    "None of the above" means no money at all. Money is issued by the central bank with the authority granted by the government which is in turn granted by the people. So long as there is money, there will be a monetary policy. The government doing "nothing" is not an option.
    - xlm1717 11y ago
      I think nothing (or as fche said "none of the above) was an option. The economy is sick because we insisted the sickest companies in the economy were "too big to fail". We're keeping them on life support when they're sucking the life out of the economy.
    - laotzu 11y ago
      People --> government --> central bank --> money --> people... This is 2015, why do we need so many middle men and such an inefficient closed source volatile paper based system? How about letting the people issue their own money based on open source computer algorithms and p2p networks instead of oligarchy voodoo?
    - fche 11y ago
      It was not "doing nothing" I was proposing, but "giving nothing", in the specific sense of donating (vs. paying for a service).
crdoconnor 11y ago
Some background on Larry Summers: http://www.prosebeforehos.com/article-of-the-day/04/10/the-corruption-of-larry-summers/ http://www.prosebeforehos.com/article-of-the-day/04/10/the-c...
AndrewKemendo 11y ago
These are quite bold, and arguably heretical statements to modern neoclassical economics: New Keynesian models imply that stabilization policies cannot affect the average level of output over time and that the only effect policy can have is on the amplitude of economic fluctuations, not on the level of output But Summers tries to refute that, just by saying it's absurd and giving the costanzian platitude "well I gotta do something!" I think he makes his best point by saying: Beginning the study of stabilization with this assumption takes away much of the motivation for doing macroeconomics. Indeed it does Larry.
deleted 11y ago
[deleted]
jstalin 11y ago
Surprise surprise, world's central banks are engaged on the largest bout of central planning the world has even seen and... guess what, it doesn't work!
clavalle 11y ago
Perhaps if we expand the meaning of Keyensian "Government investment in infrastructure" to include human infrastructure and provide stimulus, or at least a stable platform, for the actual nodes of demand (the people) we can get back to optimal growth faster. The idea that we can have a quarter of the people or more (the poor and working poor) in a state of playing zero sum or negative sum games -- exploitative economic relationships -- non-convex factors in what should, ideally, be a convex efficiency curve, and still reach market efficiency is silly. We just reach the state where the convex portions of our economy cannot compensate for those massive destructions or stagnations of value during times of contraction so it is easier to shake those results out of the aggregate. But that destruction of value happens even in times of relative prosperity and overall growth and it would be wise to whittle down the problem while is relatively painless. Take pain and death out of the equation for the people through direct stimulus. Create a market where everyone must be enticed with value-add to trade. Watch demand bubble up and create the strongest growth possible.
- themartorana 11y ago
  Direct stimulus in what form? Guaranteed minimum income? The next stimulus really needs to go directly to the people, not banks.
  - clavalle 11y ago
    Guaranteed minimum income, reverse taxation, or merely a solid welfare program that provides solid housing, food, and medical care -- basically anything that someone would die or be in pain without...these are all possible solutions. I'd advocate for an experimental approach with smaller populations with different possible solutions, ratcheting them up as they are shown to be successful and sustainable.
    - at-fates-hands 11y ago
      >> Guaranteed minimum income, reverse taxation, or merely a solid welfare program that provides solid housing, food, and medical care The only problem with this is how this is impossible to scale to proper levels in the US. This works great in smaller economies (like you're advocating) like Scandinavian countries where you have a much smaller population and it's easy to support a few million people. You also have to take into account the Scandinavian cultural norms as well. When you have over 300 million? As we've seen in recent years, when you institute measures like this it actually creates more dependency and self reliance on the government - not something I would think you'd want to advocate on such a large scale.
ThomPete 11y ago
There are two very important things that would need to be factored in before we start to better understand what is going on. 1) We need to understand that we live in a global economy not a national one. One of the key elements to understanding this global economy would probably be to look at something like Supply Chain Management. I.e. the productivity of china should be closely tied with an understand of US economy. They aren't separate anymore than two computers connected via a network is. 2) We need to find a way to factor in technology, digitalization and automatization instead of treating it as the externality it is today, by almost all economic thinkers. Especially those who advice countries and central banks. It is one of the key components in understanding what is going on. And before we find a way to factor that in, we will keep fighting in the blind. Until then we will have this fruitless idealistic fight between Keynes and Austerity and not get to the heart of the discussion.
- laotzu 11y ago
  Your ideas strongly relate to the message of the late Buckminster Fuller, former president of the Mensa Society and winner of the Presidential Medal of Freedom. Here are just a couple quotes that your post made me think of: >Humanity is now experiencing history's most difficult evolutionary transformation. We are moving away from a rooted life-style with a 95-percent rate of illiteracy. We are almost unconsciously drifting away from selfidentity with our ages-long, physically-remote-from-one-another existence as 150 separate, sovereign nations. Now the uprooted humans of all nations are spontaneously deploying into their physically integrated highways and airways and satellite-relayed telephone speakways, into a big-city way-stationed, world-around living system. We may soon be atom-bombed into extinction by the preemptive folly of the political puppet administrators fronting for the exclusively-for-money-making, supranational corporations' weaponry industry of the now hopelessly bankrupt greatest-weapons-manufacturing nation (the U.S.A.). If not bomb-terminated, we are on our ever swifter way to becoming an omni-integrated, majorly literate, unified Spaceship Earth society. The new human networks' emergence represents the natural evolutionary expansion into the just completed, thirty-years-in - its-buildings world-embracing, physical communications network. The new reorienting of human networking constitutes the heart-and-mind-pumped flow of life and intellect into the world arteries. -Grunch of Giants (1982) >I'm going to give you an important kind of a picture. I hear a lot of people say "I don't like machinery and technology it's making a lot of trouble", so were going to take all the machinery away from all the countries of the world, all machinery, all the tracks and the wires, and the works and were going to dump it all in the ocean. And you discover that within 6 months, 2 billion people will die of starvation having gone through great pain. So we say "that's not a very good idea lets put all the machinery back where it was." Then, were going to take all the politicians from all the countries around the world and we're going to send them on a trip around the sun, and you'll find we keep right on eating. And the political barriers now... scientists say very clear you could make the world work and take care of 100% of the people at a higher standard of living that anyone has ever known despite the increasing population, but you cant do it with the barriers, any more than you can try run a human organism with a wall between the ear the eye and the stomach. It is an organic whole, it is total industrialization.
6stringmerc 11y ago
Bill Gross is a rather polarizing figure, but compared to Summers, I'd say he's a lot more "hands on" and experienced in the way that financial systems work - or don't. Here's his latest Janus newsletter / update: https://www.janus.com/bill-gross-investment-outlook?utm_campaign=Bill%20Gross%20Feb%20IO&utm_medium=social%20&utm_source=twitter&utm_content=Bill_Gross_Feb https://www.janus.com/bill-gross-investment-outlook?utm_camp...
- mikeyouse 11y ago
  Bill Gross makes money from high interest rates, he's been wrong for about 7 years now with regards to every one of his predictions (QE will cause high inflation, stopping QE will cause inflation, stopping QE will increase bond yields), I wouldn't take his advice too seriously.
  - 6stringmerc 11y ago
    Savers are getting killed by no interest rates available in the market. He is no less wrong than the Federal Reserve saying that zero interest rate policy is good for growth, or that their policies aren't responsible for bubbles, etc, etc, etc.
    - pessimizer 11y ago
      The Federal Reserve having an opinion about the economy that is different from yours has nothing to do with Bill Gross being factually incorrect in every prediction he has made about the economy since the recession, and performing badly. You don't get to distribute wrongness equally between supply-side and demand-side people; that's not how reason works.
      - 6stringmerc 11y ago
        What you call opinion I call active decision making, and while Gross hasn't "predicted" well, neither has the Federal Reserve, thus they are equivalent, practically speaking, in their efficacy. They balance each other out. But sure, grind that axe against his perspectives all you want, I've got my own CFA Level 3 Asset Manager guy that I follow closely.
deleted 11y ago
[deleted]
asquabventured 11y ago
Keynesian economics creates market failures. Government "stimulus" does not create natural demand and any "stimulus" has front-loaded costs that are paid for by future generations. Central "Planners" should be fired and our economic systems need to move to a more decentralized economic model, à la Austrian Economic Theory[1] if we ever want to see natural growth again. [1]https://en.wikipedia.org/wiki/Austrian_School https://en.wikipedia.org/wiki/Austrian_School
- ZenoArrow 11y ago
  The solution isn't decentralized economics, it's debt-free money. Get rid of the need for money to create a return for its creators and you eliminate many of the issues with money in our society, including future generations having to pay for the spending of currently active governments.
nostrademons 11y ago
I actually think there are a fair number of prominent figures that have a good grasp of what's actually going on with the economy, but they would rather make money off of it than fix it. You have to divine their theories from their actions and a few oblique public posts. The academic economics community just seems terribly out-of-touch these days, using models made a generation ago to try and explain an economy that has changed dramatically since then.
- tspike 11y ago
  Can you give an example?
  - nostrademons 11y ago
    I wasn't sure if I wanted to embarrass the people involved, but they're public figures anyway. For people: Marc Andreesen, Peter Thiel, Ray Dalio, Warren Buffett. Interestingly, neo-Schumpeterianism (as championed by Perez/Andreesen) seems to be making a comeback. For important phenomena that mainstream academic macro-economics has no explanation for: - How do you measure the "substitution effect" of greater quality at lower prices? Most standard economics metrics assume that value = price; GDP is the total value of all goods manufactured within a company. That means that when the price of a computer falls from $2000 to $200, GDP falls. When Google gives away web search, it counts for nothing; when they reduce the number of organic results to show more ads, it increases GDP. When open-source Linux replaces proprietary Windows, GDP falls. - Inflation is not uniform. Inflation in classical macroeconomics is treated as the measured price of a basket of goods, and caused by an increase in the money supply. But when the money supply increases, that increase does not filter down to all goods equally. It tends to collect at goods with high bargaining power and few substitutes (Warren Buffett was the first person I know of to note this effect). So we have seen massive inflation in the valuation of unicorns, and in the price of San Francisco real estate. We've seen high inflation in health care and the price of a college degree. We've seen steady inflation in home prices elsewhere. We've seen severe deflation in competitive consumer goods markets, and in non-unionized wages. The basket of goods used to calculate CPI is largely commodities, and so by definition tends to understate inflation. That's why the Fed is continuing to step on the gas even though the price of education, or health care, or homeownership is rapidly moving beyond the reach of average Americans. - Competition and capitalism are to some degree antonyms (this is the Peter Thiel thesis). The first goal of most companies is to build a monopoly and keep competitors out. This is covered in depth in microeconomics, but is largely ignored in macroeconomics. But monopolies behave very differently from competitive businesses when it comes to the macroeconomics fundamentals of employment, output, and wages. Monopolies tend to employ people because they have money and want to eliminate competition, not because they need output; this explains a lot of crazy economics results like why people can work 2 hours/day for six-figure salaries while others work 16 hours/day for minimum wage, or why companies buy startups and then immediately kill their products, or why companies would rather sit on cash than hire more people. All of these are mentioned as footnotes in economics textbooks, but they're mentioned to say "Yes, we know this is a problem with the model, but nobody has yet found a better way to account for these phenomena." Policy response is still very much dependent upon mainstream macroeconomics models, even though the observed effect of that policy response isn't working.
hackatroll 11y ago
The article says the U.S. is about 10% below a trend estimated through 2007. 2007 was the peek of the bubble. Why are they using 2007 as a target? The credit market was different back than. How much of that 10% output was fueled by easy credit? It might be better to use a few years before 2007 as a target. I would like to know where we are if you look at it before the Mania Phase of the bubble.
Animats 11y ago
Classical macroeconomics has some real problems. These include: - Most models of capitalism are based on trading in goods. This was a reasonable model a century ago, but today, services are much larger in the developed world. This has tax policy implications - sales and import taxes apply only to goods, not services. - Classical models assume that demand is infinite but capital is limited. For most of history, the problem was making enough stuff. In today's economies in the developed world, demand is a scarce resource but capital is not. The US population is essentially maxed out on buying power, with a low savings rate. Manufacturers could easily up production of just about anything if they could sell it. There's lots of capital around looking for something which will provide even a few percent reliable return, but few investment opportunities. This is why tweaking the capital supply, which is all the Fed can do, doesn't seem to affect much any more. - Technology has brought an asymmetry to recessions. In a recession, as demand declines, the least efficient producers drop out first and there are layoffs. Productivity increases. Now, when the recession is over, the most efficient producers scale up, maintaining the productivity level they had, increasing their market share. This may be the real cause of the "hysteresis" of which Summers writes. It's also a way in which industries become more concentrated. - Classical economics overestimates the effect of capital and underestimates the effect of technology. Recent work indicates that most economic growth is driven by technology, not capital, and has been since the Industrial Revolution two centuries ago. (Economic growth rate pre-industrial revolution: about 1%-2% per century.) - Classical models of the "free market" assume a large number of players. That's rarely the case today. One big effect of computerization is that it's now possible to run very large organizations, like Amazon, quite well. Business used to have scaling problems - beyond some size, businesses became harder to run, and couldn't get out of their own way. For most consumer-facing industries, that's no longer a problem. There's now a tendency to consolidate as far as antitrust enforcement will allow, which in the US, seems to be down to a duopoly. When the number of competitors is very small, they tend not to compete too hard. - Classical economics assumes labor is mostly direct labor, and that output requires labor inputs. Today, direct labor is way down, and most labor is indirect labor, leading to change, not direct output. Online businesses are an extreme case - doing what the business did yesterday requires almost no labor. Economics doesn't really have a handle on this yet.
- 11y ago
narrator 11y ago
There's something wrong with the cost structure in "Advanced Economies". It's just too cheap to make things in China. There are some products where the cost of the raw materials would be more expensive in the U.S than having the finished product shipped from China. There are sky high costs, and nobody can figure out where they are coming from and everyone just shrugs their shoulders. This kind of thing happens in healthcare and education too. Has anyone in manufacturing looked at the financials of a Chinese manufacturer with low unit cost? Where does the money go or not go that makes things so cheap?
- zeveb 11y ago
  > There's something wrong with the cost structure in "Advanced Economies". Yes, and that something wrong is taxation and regulation (which is a hidden form of tax). Those things are both absolutely necessary, but they greatly inflate the cost of goods and services. What's more, they tend to be well-hidden in order to prevent people from generally revolting.
  - wavefunction 11y ago
    I like regulation. I see these articles about people in China suffering from severe asthma and entire major cities where you can't go outside due to the haze of pollution and I thank my lucky stars our forerunners had the decency and common sense to think of the future and not just short-term bottom-lines.
    - mikeash 11y ago
      I visit China every couple of years and I completely agree. The terrible air quality is the worst thing about Beijing. But it does explain a decent chunk of the cost disparity. The Chinese (or at least the government) are willing to pollute the crap out of their air in order to better compete, while we are not. That doesn't mean we should join them, but it does explain their lower costs.
    - zeveb 11y ago
      > I like regulation. Hence my comment that it's, 'absolutely necessary.' But it has costs, and not every instance of regulation is absolutely necessary. > I thank my lucky stars our forerunners had the decency and common sense to think of the future and not just short-term bottom-lines. Look at photos from the 1970s. The reason we're as well-off now as we are is precisely that our forerunners weren't focusing on long-term cleanliness and instead focused on short-term profits at the expense of the environment. Then we got rich enough as a society to afford to clean it up. Note, too, that not all regulations are environmental. Look at how difficult it can be to hire a contractor in some states, or the amount of money a small business must expend to be in regulatory compliance.
jgome 11y ago
Yes, you need new euphemisms and new twisted definitions to profit from naive people, to convince them that they should buy your bullshit because they "need" it, and to tell them that govt. subsidies/legal pardons given to corporations are just fine, while giving "your" tax money poor people is a bad, terrible idea. People don't believe your BS anymore. And you know it.
sjg007 11y ago
Can anyone ELI-5?
Rumford 11y ago
Like maybe don't put a Soviet-style central committee in charge of the money supply? It's depressing to me that modern economies like the US and Europe can be so shot through with central planning, and then when they produce bad results everyone pretends it's the fault of some freewheeling laizzes-faire policy that never existed.
- licnep 11y ago
  Actually, central banks in both the US and Europe have very little control over the money supply. The money created by central banks only accounts for about 3% of the monetary base, the remaining 97% of money that circulates in the economy is created by private banks, lending money out of thin air. Therefore money supply is actually dictated by how confident private banks are to lend to the public. A central bank can try to incentivize lending by lowering interest rates, but in the end it's private banks who choose whether to lend or not (in Europe it didn't work so well..). It's still a pretty fucked up system either way. I think more people should work on the issue of money supply, it's probably the single most important problem in any economy.
  - shawkinaw 11y ago
    Do you have a link that explains this lending mechanism? I saw it referred to in a previous HN discussion a while back, and would like to know more about it, since it sounds ludicrous.
    - licnep 11y ago
      There is a group called Positive Money that has a youtube channel with some videos about it. I don't remember which ones are the best, but this is a playlist from them which gave an high level overview in simple terms: https://www.youtube.com/playlist?list=PLyl80QTKi0gPBcb32paMvXxcq7UUeJskV https://www.youtube.com/playlist?list=PLyl80QTKi0gPBcb32paMv... They have more in-depth talks on their channel, if I find some better links I'll give them to you. I can't say this theory is 100% correct, though it does explain things like the housing bubble, the failure of the ECB policy, and eurozone deflation despite the ultra low interest rates. So far, out of everything I've read and watched, I think their model is the one that better explains the current system of money creation, but if you have any alternative links with I'm always open to reading different things on this topic.
chipotle_coyote 11y ago

147 points by Amorymeltzer 11y ago

Related: http://www.nytimes.com/2015/11/01/upshot/is-the-economy-really-in-trouble.html http://www.nytimes.com/2015/11/01/upshot/is-the-economy-real... (plus a great gif in the header) When economists are unsure what exactly is going on, what does that mean? There's the quote by Buffet, "Be fearful when others are greedy and greedy when others are fearful". What should one do when others have no idea what's going on?

yoyar 11y ago
What one should do, if one was a politician with the power to do so, is less.
rushabh 11y ago
I think we are witnessing a massive de-centralization of economics. We seem to live in multi-tiered cellular societies that seem decoupled from one another. People living in the same city are experience vastly different trends with some are struggling, some are prospering. Like how small startups are able to create value that usually needed large corporate structures, small trends are becoming powerful and independent. People are getting news from a large variety of sources and living in their own bubbles. The new normal is that there is no normal. Those who are fearful and greedy are both right, but they no longer reside in the same world.
mikeash 11y ago
Extrapolating from Buffet's advice, the thing to do when others are uncertain and don't know what's going would be to be extremely certain and know precisely what's going on! Accomplishing this is left as an exercise for the reader.
anigbrowl 11y ago
I've gotten quite interested in EO Wilson's social biology approach.

caseysoftware 11y ago

"Standard new Keynesian macroeconomics essentially abstracts away from most of what is important in macroeconomics." Yes, that has been the criticism for decades. There is nothing new here. The only time Keynesian economics has "fixed" an economy was WW2 when we (the US, specifically) had full employment because of the draft and all of our competition had been literally flattened and/or killed. For another look at it, check out the Keynes vs Hayek rap battle: https://www.youtube.com/watch?v=GTQnarzmTOc https://www.youtube.com/watch?v=GTQnarzmTOc

astazangasta 11y ago
Don't watch that rap battle, hayek's insights are surely worse than Keynes. At least we can attribute one repaired economy to Keynes, we can attribute zero to Hayek. In addition, while Keynes may not help us resume prior output, he at least gives us some way to recover from recessions. Hayek's given us nothing, unless you're one of those people who thinks "The Road to Serfdom" is a good book.
- xlm1717 11y ago
  We could have been following any economic ideology and recovered strongly post-war, for the reason caseysoftware gave. We can attribute zero to Hayek because the Keynesians have been running the economy for decades.
  - Mikeb85 11y ago
    > We can attribute zero to Hayek because the Keynesians have been running the economy for decades. No we can attribute zero to Hayek because he had no notable macroeconomic insights. Most of his work was related to the business cycle, investment and choice (ie. microeconomics).
- sbuttgereit 11y ago
  First: watch the rap battle. Avoiding (or urging the avoiding) of contrarian ideas is how you perpetuate ignorance. If Keynes is worth is weight in stimulus, he'll be able to withstand the counter argument and win the day: if not, then there's even greater reason to see other perspectives. Sorry, but not buying your argument. If anything we can attribute a greater length of the Great Depression to the Keynesian inspired policies, not a repair (assuming that is the "fixed" economy attributed to Keynes). For some reference on this consider: http://newsroom.ucla.edu/releases/FDR-s-Policies-Prolonged-Depression-5409 http://newsroom.ucla.edu/releases/FDR-s-Policies-Prolonged-D... WW II ended the Depression insofar as its impact on employment, but it also destroyed (literally) massive amounts of accumulated capital. Global quality of life was greatly reduced: a failure by any rational standard. I suspect the necessary economic restructuring for war, and the later return to a peacetime economy, has much more to do with the repair of the economy that anything Keynes ever conjured. Later we have substantial numbers of completely unimpressive Keynesianesque experiments, including our own current "recovery". For Hayek (or similar) you are correct: there are really no instances of his policies repairing an economy... but could you tell me how many times approaches like his have been tried? There's some argument for the Depression of 1920, but on the whole reduction in Government intervention during an economic downturn is just not how bureaucrats roll. So I count no attempts. To suggest there are no Hayekian successes because Hayek fails is simply deeply flawed thinking; there are no successes simply because those approaches have never been tried. I think the closest you can see are in certain emerging economies where, at first, no one cares to regulate because there is nothing of worth there from a political power point of view (e.g. early Hong Kong, much of the early U.S. even). And yes, I do consider the "Road to Serfdom" a good book :-)

AngrySkillzz 11y ago

Wouldn't a simpler hypothesis be that output trends before a recession are artificially high? We know fairly well that economic trends tend to feed back on themselves; the idea that growth leads to an acceleration of growth which overreaches and ends in a crash isn't particularly far-fetched.

JamesBarney 11y ago
The problem is its very hard to tell a plausible sounding about what over artificially high production looks like. If you lived in an island economy and went from producing 100 widgets to producing 95. What exactly is artificial about the extra 5 widgets you supplied? You could argue that people were incentivized to work harder than they actually wanted to work but then you find a wage increase as we entered the recession. You could argue that technology got worse. But that's really strange because it doesn't seem like in 2008 we forgot how to efficiently make things. So that leaves the story Larry Summers is talking about.
- AngrySkillzz 11y ago
  I'm talking about what you might call "artificial demand," not capability. Example: our corporate customers decided to buy 5 more widgets in 2007 than in 2008 because they saw the economy improving, mostly due to the growth of household on-paper wealth and the associated increase in consumer spending, and were forecasting a growth in their own business. When the housing market collapsed and consumer spending fell off a cliff, those customers no longer had any reason to buy the extra widgets. In that way, you can say output is artificial. A large mass of people spending above their means because of a perceived increase in wealth, along with other psychological factors, leads to an economy with rising demand. When it turns out that wealth increase was a phantom and those psychological factors disappear, there is less demand for widgets and thus output decreases. Output isn't "how much we can make," it's "how much we DO make." The amount we produce is proportional to the demand for that product.
  - ddingus 11y ago
    >>>... Additionally, the pain of correction can lead to a dampening in overall demand compared to what it was before. I went through a scenario much like this. Company had a single customer that is dominant, and that customer was over optimistic about the level of demand it was seeing from it's marketplace. Orders grew to large levels, company expands, etc... Then reality hits. That customer has a ton of inventory and wants relief! Worse, they could just order nothing and do a sell off for a time to recover, but that may destroy a valued partner, who didn't really do anything wrong, other than supply what they could have seen as too much. Long term, that is expensive for them as they would lose a valuable part of their product line. The solution ended up being sharing the problem with both parties running very lean while inventory levels drop. Now, coming out the other side, both parties are far more conservative. Risks are seen as bigger than they really are, and overall run rate business just isn't what it should be based on the data from before. Inventory, sales, and some other data is more closely tracked to answer the questions of "what DO we make?", and "Will it sell?" by both parties, who share the impacts of those answers. Hysteresis, in the sense being talked about here, could arise from artifacts of an event like this. When things were running high, expansion came either at the expense of capital held by the company, or debt, and both of those have impacts on the risk appetite of the business. It's all moderated now. That moderation is both real, in terms of hard data, cash, etc... and human, in that raw fear of another instability causing everyone to lose gains had since that last one... It's been an interesting journey. The reality is a took a very considerable time to reach a point where meaningful risks make sense again. About two years. This, despite the problem itself resolved within 6 - 8 months. Turns out, the motivation to take some new risks and make reasonable investments is being driven by a slight downward trend in sales. It's not much, but it's not growth. The additional "hysteresis" impact appears to be felt through the marketplace. That big event seemed to dampen way more than one would expect at first glance. I believe that slight trend is the change in risk / value perception as well as the market seeing the brand fluctuate and that resulting in a loss of confidence, or a crack where competing brands gained some ground. This is hard to resolve though. There isn't enough data. I've made some changes in marketing in an attempt to get it, and or just correct for the trend in an obvious, measured way. Jury is still out on that. Having production satisfy demand is very important in the vast majority of cases. Overproduction either tends to create instability, or a reduction in value as too much is out there, or high inventory costs that tend to marginalize the value of an overproduction event. Exceptions can be, say an overproduction to insure supply during a planned downtime, or expansion, but that can be expensive money and resource availability...

nemo 11y ago

Larry may be right on some points, but given his past support for and architecting of deregulation of the U.S financial system (including the repeal of the Glass-Steagall Act) while he was in the Clinton admin., along with support for the disastrous privatization of the economies of the Post-Soviet states that's lead to massive human suffering and political failure, as well as gambling with Harvard's endowment and losing the school $1.8 billion, triggering layoffs and budget slashing, I think we'd do well to find advice from those with a less predictable and disastrous track record.

alienjr 11y ago
"support for the disastrous privatization of the economies of the Post-Soviet states that's lead to massive human suffering" Lack of privatization in Post-Soviet states lead to massive human suffering. In Poland the government constantly subsidies all companies that weren't privitzed in 90s. What's worse quality of products and services in these industries is terrible. That's why for instance electricity in Poland is one of the most expensive in Europe. And it is impossible to change anything because all these companies are highly unionized and have huge political influences during elections. Little state ownership may work fine in countries that has different culture in rest of the economy has been capitalistic for last 200 years. In Post-Soviet world it is disastrous. Look at Russia for intance - Gazprom and other state companies were overtaken by the Putin's mafia.
- RobertoG 11y ago
  "Gazprom and other state companies were overtaken by the Putin's mafia" That is called "privatization".
  - jahewson 11y ago
    Sort of. The Russian government still owns a majority stake in Gazprom and Putin's conquests have been under the banner of moving corrupt private oil companies back into the public hands of Gazprom. So it's really a landgrab by the state, which happens to own a private company. But it was the US's policy of rapid "shock" privatisation which resulted in the unmanaged sell-off of the original state assets in the 1990s and the creation of those oligarchs. It's like selling USPS for $1m - that's not privatisation, it's madness.

youngtaff 11y ago

Perhaps instead of giving cheap money to the banks so they can make a profit at our expense, we could give the money to the people so they can use it the 'best' way for them (save, spend, pay off debt etc)

fche 11y ago
... or how about "none of the above".
- littletimmy 11y ago
  "None of the above" means no money at all. Money is issued by the central bank with the authority granted by the government which is in turn granted by the people. So long as there is money, there will be a monetary policy. The government doing "nothing" is not an option.
  - xlm1717 11y ago
    I think nothing (or as fche said "none of the above) was an option. The economy is sick because we insisted the sickest companies in the economy were "too big to fail". We're keeping them on life support when they're sucking the life out of the economy.
  - laotzu 11y ago
    People --> government --> central bank --> money --> people... This is 2015, why do we need so many middle men and such an inefficient closed source volatile paper based system? How about letting the people issue their own money based on open source computer algorithms and p2p networks instead of oligarchy voodoo?
  - fche 11y ago
    It was not "doing nothing" I was proposing, but "giving nothing", in the specific sense of donating (vs. paying for a service).

crdoconnor 11y ago

Some background on Larry Summers: http://www.prosebeforehos.com/article-of-the-day/04/10/the-corruption-of-larry-summers/ http://www.prosebeforehos.com/article-of-the-day/04/10/the-c...

AndrewKemendo 11y ago

These are quite bold, and arguably heretical statements to modern neoclassical economics: New Keynesian models imply that stabilization policies cannot affect the average level of output over time and that the only effect policy can have is on the amplitude of economic fluctuations, not on the level of output But Summers tries to refute that, just by saying it's absurd and giving the costanzian platitude "well I gotta do something!" I think he makes his best point by saying: Beginning the study of stabilization with this assumption takes away much of the motivation for doing macroeconomics. Indeed it does Larry.

deleted 11y ago

[deleted]

jstalin 11y ago

Surprise surprise, world's central banks are engaged on the largest bout of central planning the world has even seen and... guess what, it doesn't work!

clavalle 11y ago

Perhaps if we expand the meaning of Keyensian "Government investment in infrastructure" to include human infrastructure and provide stimulus, or at least a stable platform, for the actual nodes of demand (the people) we can get back to optimal growth faster. The idea that we can have a quarter of the people or more (the poor and working poor) in a state of playing zero sum or negative sum games -- exploitative economic relationships -- non-convex factors in what should, ideally, be a convex efficiency curve, and still reach market efficiency is silly. We just reach the state where the convex portions of our economy cannot compensate for those massive destructions or stagnations of value during times of contraction so it is easier to shake those results out of the aggregate. But that destruction of value happens even in times of relative prosperity and overall growth and it would be wise to whittle down the problem while is relatively painless. Take pain and death out of the equation for the people through direct stimulus. Create a market where everyone must be enticed with value-add to trade. Watch demand bubble up and create the strongest growth possible.

themartorana 11y ago
Direct stimulus in what form? Guaranteed minimum income? The next stimulus really needs to go directly to the people, not banks.
- clavalle 11y ago
  Guaranteed minimum income, reverse taxation, or merely a solid welfare program that provides solid housing, food, and medical care -- basically anything that someone would die or be in pain without...these are all possible solutions. I'd advocate for an experimental approach with smaller populations with different possible solutions, ratcheting them up as they are shown to be successful and sustainable.
  - at-fates-hands 11y ago
    >> Guaranteed minimum income, reverse taxation, or merely a solid welfare program that provides solid housing, food, and medical care The only problem with this is how this is impossible to scale to proper levels in the US. This works great in smaller economies (like you're advocating) like Scandinavian countries where you have a much smaller population and it's easy to support a few million people. You also have to take into account the Scandinavian cultural norms as well. When you have over 300 million? As we've seen in recent years, when you institute measures like this it actually creates more dependency and self reliance on the government - not something I would think you'd want to advocate on such a large scale.

ThomPete 11y ago

There are two very important things that would need to be factored in before we start to better understand what is going on. 1) We need to understand that we live in a global economy not a national one. One of the key elements to understanding this global economy would probably be to look at something like Supply Chain Management. I.e. the productivity of china should be closely tied with an understand of US economy. They aren't separate anymore than two computers connected via a network is. 2) We need to find a way to factor in technology, digitalization and automatization instead of treating it as the externality it is today, by almost all economic thinkers. Especially those who advice countries and central banks. It is one of the key components in understanding what is going on. And before we find a way to factor that in, we will keep fighting in the blind. Until then we will have this fruitless idealistic fight between Keynes and Austerity and not get to the heart of the discussion.

laotzu 11y ago
Your ideas strongly relate to the message of the late Buckminster Fuller, former president of the Mensa Society and winner of the Presidential Medal of Freedom. Here are just a couple quotes that your post made me think of: >Humanity is now experiencing history's most difficult evolutionary transformation. We are moving away from a rooted life-style with a 95-percent rate of illiteracy. We are almost unconsciously drifting away from selfidentity with our ages-long, physically-remote-from-one-another existence as 150 separate, sovereign nations. Now the uprooted humans of all nations are spontaneously deploying into their physically integrated highways and airways and satellite-relayed telephone speakways, into a big-city way-stationed, world-around living system. We may soon be atom-bombed into extinction by the preemptive folly of the political puppet administrators fronting for the exclusively-for-money-making, supranational corporations' weaponry industry of the now hopelessly bankrupt greatest-weapons-manufacturing nation (the U.S.A.). If not bomb-terminated, we are on our ever swifter way to becoming an omni-integrated, majorly literate, unified Spaceship Earth society. The new human networks' emergence represents the natural evolutionary expansion into the just completed, thirty-years-in - its-buildings world-embracing, physical communications network. The new reorienting of human networking constitutes the heart-and-mind-pumped flow of life and intellect into the world arteries. -Grunch of Giants (1982) >I'm going to give you an important kind of a picture. I hear a lot of people say "I don't like machinery and technology it's making a lot of trouble", so were going to take all the machinery away from all the countries of the world, all machinery, all the tracks and the wires, and the works and were going to dump it all in the ocean. And you discover that within 6 months, 2 billion people will die of starvation having gone through great pain. So we say "that's not a very good idea lets put all the machinery back where it was." Then, were going to take all the politicians from all the countries around the world and we're going to send them on a trip around the sun, and you'll find we keep right on eating. And the political barriers now... scientists say very clear you could make the world work and take care of 100% of the people at a higher standard of living that anyone has ever known despite the increasing population, but you cant do it with the barriers, any more than you can try run a human organism with a wall between the ear the eye and the stomach. It is an organic whole, it is total industrialization.

6stringmerc 11y ago

Bill Gross is a rather polarizing figure, but compared to Summers, I'd say he's a lot more "hands on" and experienced in the way that financial systems work - or don't. Here's his latest Janus newsletter / update: https://www.janus.com/bill-gross-investment-outlook?utm_campaign=Bill%20Gross%20Feb%20IO&utm_medium=social%20&utm_source=twitter&utm_content=Bill_Gross_Feb https://www.janus.com/bill-gross-investment-outlook?utm_camp...

mikeyouse 11y ago
Bill Gross makes money from high interest rates, he's been wrong for about 7 years now with regards to every one of his predictions (QE will cause high inflation, stopping QE will cause inflation, stopping QE will increase bond yields), I wouldn't take his advice too seriously.
- 6stringmerc 11y ago
  Savers are getting killed by no interest rates available in the market. He is no less wrong than the Federal Reserve saying that zero interest rate policy is good for growth, or that their policies aren't responsible for bubbles, etc, etc, etc.
  - pessimizer 11y ago
    The Federal Reserve having an opinion about the economy that is different from yours has nothing to do with Bill Gross being factually incorrect in every prediction he has made about the economy since the recession, and performing badly. You don't get to distribute wrongness equally between supply-side and demand-side people; that's not how reason works.
    - 6stringmerc 11y ago
      What you call opinion I call active decision making, and while Gross hasn't "predicted" well, neither has the Federal Reserve, thus they are equivalent, practically speaking, in their efficacy. They balance each other out. But sure, grind that axe against his perspectives all you want, I've got my own CFA Level 3 Asset Manager guy that I follow closely.

deleted 11y ago

[deleted]

asquabventured 11y ago

Keynesian economics creates market failures. Government "stimulus" does not create natural demand and any "stimulus" has front-loaded costs that are paid for by future generations. Central "Planners" should be fired and our economic systems need to move to a more decentralized economic model, à la Austrian Economic Theory[1] if we ever want to see natural growth again. [1]https://en.wikipedia.org/wiki/Austrian_School https://en.wikipedia.org/wiki/Austrian_School

ZenoArrow 11y ago
The solution isn't decentralized economics, it's debt-free money. Get rid of the need for money to create a return for its creators and you eliminate many of the issues with money in our society, including future generations having to pay for the spending of currently active governments.

nostrademons 11y ago

I actually think there are a fair number of prominent figures that have a good grasp of what's actually going on with the economy, but they would rather make money off of it than fix it. You have to divine their theories from their actions and a few oblique public posts. The academic economics community just seems terribly out-of-touch these days, using models made a generation ago to try and explain an economy that has changed dramatically since then.

tspike 11y ago
Can you give an example?
- nostrademons 11y ago
  I wasn't sure if I wanted to embarrass the people involved, but they're public figures anyway. For people: Marc Andreesen, Peter Thiel, Ray Dalio, Warren Buffett. Interestingly, neo-Schumpeterianism (as championed by Perez/Andreesen) seems to be making a comeback. For important phenomena that mainstream academic macro-economics has no explanation for: - How do you measure the "substitution effect" of greater quality at lower prices? Most standard economics metrics assume that value = price; GDP is the total value of all goods manufactured within a company. That means that when the price of a computer falls from $2000 to $200, GDP falls. When Google gives away web search, it counts for nothing; when they reduce the number of organic results to show more ads, it increases GDP. When open-source Linux replaces proprietary Windows, GDP falls. - Inflation is not uniform. Inflation in classical macroeconomics is treated as the measured price of a basket of goods, and caused by an increase in the money supply. But when the money supply increases, that increase does not filter down to all goods equally. It tends to collect at goods with high bargaining power and few substitutes (Warren Buffett was the first person I know of to note this effect). So we have seen massive inflation in the valuation of unicorns, and in the price of San Francisco real estate. We've seen high inflation in health care and the price of a college degree. We've seen steady inflation in home prices elsewhere. We've seen severe deflation in competitive consumer goods markets, and in non-unionized wages. The basket of goods used to calculate CPI is largely commodities, and so by definition tends to understate inflation. That's why the Fed is continuing to step on the gas even though the price of education, or health care, or homeownership is rapidly moving beyond the reach of average Americans. - Competition and capitalism are to some degree antonyms (this is the Peter Thiel thesis). The first goal of most companies is to build a monopoly and keep competitors out. This is covered in depth in microeconomics, but is largely ignored in macroeconomics. But monopolies behave very differently from competitive businesses when it comes to the macroeconomics fundamentals of employment, output, and wages. Monopolies tend to employ people because they have money and want to eliminate competition, not because they need output; this explains a lot of crazy economics results like why people can work 2 hours/day for six-figure salaries while others work 16 hours/day for minimum wage, or why companies buy startups and then immediately kill their products, or why companies would rather sit on cash than hire more people. All of these are mentioned as footnotes in economics textbooks, but they're mentioned to say "Yes, we know this is a problem with the model, but nobody has yet found a better way to account for these phenomena." Policy response is still very much dependent upon mainstream macroeconomics models, even though the observed effect of that policy response isn't working.

hackatroll 11y ago

The article says the U.S. is about 10% below a trend estimated through 2007. 2007 was the peek of the bubble. Why are they using 2007 as a target? The credit market was different back than. How much of that 10% output was fueled by easy credit? It might be better to use a few years before 2007 as a target. I would like to know where we are if you look at it before the Mania Phase of the bubble.

Animats 11y ago

Classical macroeconomics has some real problems. These include: - Most models of capitalism are based on trading in goods. This was a reasonable model a century ago, but today, services are much larger in the developed world. This has tax policy implications - sales and import taxes apply only to goods, not services. - Classical models assume that demand is infinite but capital is limited. For most of history, the problem was making enough stuff. In today's economies in the developed world, demand is a scarce resource but capital is not. The US population is essentially maxed out on buying power, with a low savings rate. Manufacturers could easily up production of just about anything if they could sell it. There's lots of capital around looking for something which will provide even a few percent reliable return, but few investment opportunities. This is why tweaking the capital supply, which is all the Fed can do, doesn't seem to affect much any more. - Technology has brought an asymmetry to recessions. In a recession, as demand declines, the least efficient producers drop out first and there are layoffs. Productivity increases. Now, when the recession is over, the most efficient producers scale up, maintaining the productivity level they had, increasing their market share. This may be the real cause of the "hysteresis" of which Summers writes. It's also a way in which industries become more concentrated. - Classical economics overestimates the effect of capital and underestimates the effect of technology. Recent work indicates that most economic growth is driven by technology, not capital, and has been since the Industrial Revolution two centuries ago. (Economic growth rate pre-industrial revolution: about 1%-2% per century.) - Classical models of the "free market" assume a large number of players. That's rarely the case today. One big effect of computerization is that it's now possible to run very large organizations, like Amazon, quite well. Business used to have scaling problems - beyond some size, businesses became harder to run, and couldn't get out of their own way. For most consumer-facing industries, that's no longer a problem. There's now a tendency to consolidate as far as antitrust enforcement will allow, which in the US, seems to be down to a duopoly. When the number of competitors is very small, they tend not to compete too hard. - Classical economics assumes labor is mostly direct labor, and that output requires labor inputs. Today, direct labor is way down, and most labor is indirect labor, leading to change, not direct output. Online businesses are an extreme case - doing what the business did yesterday requires almost no labor. Economics doesn't really have a handle on this yet.

11y ago

narrator 11y ago

There's something wrong with the cost structure in "Advanced Economies". It's just too cheap to make things in China. There are some products where the cost of the raw materials would be more expensive in the U.S than having the finished product shipped from China. There are sky high costs, and nobody can figure out where they are coming from and everyone just shrugs their shoulders. This kind of thing happens in healthcare and education too. Has anyone in manufacturing looked at the financials of a Chinese manufacturer with low unit cost? Where does the money go or not go that makes things so cheap?

zeveb 11y ago
> There's something wrong with the cost structure in "Advanced Economies". Yes, and that something wrong is taxation and regulation (which is a hidden form of tax). Those things are both absolutely necessary, but they greatly inflate the cost of goods and services. What's more, they tend to be well-hidden in order to prevent people from generally revolting.
- wavefunction 11y ago
  I like regulation. I see these articles about people in China suffering from severe asthma and entire major cities where you can't go outside due to the haze of pollution and I thank my lucky stars our forerunners had the decency and common sense to think of the future and not just short-term bottom-lines.
  - mikeash 11y ago
    I visit China every couple of years and I completely agree. The terrible air quality is the worst thing about Beijing. But it does explain a decent chunk of the cost disparity. The Chinese (or at least the government) are willing to pollute the crap out of their air in order to better compete, while we are not. That doesn't mean we should join them, but it does explain their lower costs.
  - zeveb 11y ago
    > I like regulation. Hence my comment that it's, 'absolutely necessary.' But it has costs, and not every instance of regulation is absolutely necessary. > I thank my lucky stars our forerunners had the decency and common sense to think of the future and not just short-term bottom-lines. Look at photos from the 1970s. The reason we're as well-off now as we are is precisely that our forerunners weren't focusing on long-term cleanliness and instead focused on short-term profits at the expense of the environment. Then we got rich enough as a society to afford to clean it up. Note, too, that not all regulations are environmental. Look at how difficult it can be to hire a contractor in some states, or the amount of money a small business must expend to be in regulatory compliance.

jgome 11y ago

Yes, you need new euphemisms and new twisted definitions to profit from naive people, to convince them that they should buy your bullshit because they "need" it, and to tell them that govt. subsidies/legal pardons given to corporations are just fine, while giving "your" tax money poor people is a bad, terrible idea. People don't believe your BS anymore. And you know it.

sjg007 11y ago

Can anyone ELI-5?

Rumford 11y ago

Like maybe don't put a Soviet-style central committee in charge of the money supply? It's depressing to me that modern economies like the US and Europe can be so shot through with central planning, and then when they produce bad results everyone pretends it's the fault of some freewheeling laizzes-faire policy that never existed.

licnep 11y ago
Actually, central banks in both the US and Europe have very little control over the money supply. The money created by central banks only accounts for about 3% of the monetary base, the remaining 97% of money that circulates in the economy is created by private banks, lending money out of thin air. Therefore money supply is actually dictated by how confident private banks are to lend to the public. A central bank can try to incentivize lending by lowering interest rates, but in the end it's private banks who choose whether to lend or not (in Europe it didn't work so well..). It's still a pretty fucked up system either way. I think more people should work on the issue of money supply, it's probably the single most important problem in any economy.
- shawkinaw 11y ago
  Do you have a link that explains this lending mechanism? I saw it referred to in a previous HN discussion a while back, and would like to know more about it, since it sounds ludicrous.
  - licnep 11y ago
    There is a group called Positive Money that has a youtube channel with some videos about it. I don't remember which ones are the best, but this is a playlist from them which gave an high level overview in simple terms: https://www.youtube.com/playlist?list=PLyl80QTKi0gPBcb32paMvXxcq7UUeJskV https://www.youtube.com/playlist?list=PLyl80QTKi0gPBcb32paMv... They have more in-depth talks on their channel, if I find some better links I'll give them to you. I can't say this theory is 100% correct, though it does explain things like the housing bubble, the failure of the ECB policy, and eurozone deflation despite the ultra low interest rates. So far, out of everything I've read and watched, I think their model is the one that better explains the current system of money creation, but if you have any alternative links with I'm always open to reading different things on this topic.

chipotle_coyote 11y ago