A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Tuesday, June 15, 2010

Transcript: 391 David Levy on the Forecast, Peter Boockvar on the Treasury View

Listen to this episode


Today on the podcast, the Forecast with David Levy standing in; Idiot of the Week with Peter Boockvar; an exercise in sorting Keynesians -- New Keynesians, Neo Keynesians, Post Keynesians -- we'll give it a try. First, Our reading of the various analysts is that the good ones are getting leverage to the downside.

Calculated Risk is out today with numbers that show the economy would have to grow at three percent real GDI just to keep the unemployment rate in the high nines. If we got six percent real growth over one year, the unemployment rate would come down to barely under eight. This is recovery? I mean, we're coming up on twelve full months of this so-called recovery and we can't do better than this?

No, we can't. The economy is still smothered by huge private debt.

Expanding on that on the Forecast today, David Levy of the Levy Forecast Center.



This excerpt is taken from Tech Ticker at Yahoo. When Levy mentions profits here, however, be aware he is not talking about the simple financial profits we first think of, but of everthing above the technologically determined costs of production.


But what about the G-20? Even the policy heads of major governments say government is not the solution, but the problem going forward, and will have to consolidate.


The bouncing along the bottom data included recently a very disappointing jobs report. Private sector jobs increased a miniscule 41,000 last month. Were we to average that level over the next year, according to Calculated Risk's chart with which we led off the podcast, the unemployment rate would be around ten and a half.

But here is our Idiot of the Week, Peter Boockvar, responding to those employment numbers with the unlikely diagnosis that government should get out of the way.


The economy is falling and the best thing is for it to hit the ground hard. If we survive, we'll be in good shape to go on. At least that's what I hear him saying. Peter Boockvar: IDIOT OF THE WEEK. Thank you, Marketwatch.

Let's agree that three Years ago Keynesian was not the thing to be. Having been reviled in the 1970s by Monetarism and pushed aside in the 1980s in favor of Market Fundamentalism, by the 1990s and 2000s, even the pronunciation had been lost, and we were Keensians.

With the advent of the crisis, pundits and others leapfrogged back over the decades to resurrect the Keynes of the 1930s. Not a bad idea, but it missed and continues to miss the productive development of his thought in Hyman Minsky, Steve Keen and others. But Keynes did not ride back in triumph. He had already done that, in the 1960s, although the horse was not his own.

To be less glib, "We are all Keynesians now," is a famous quote ascribed sometimes to TIME magazine, sometimes to Richard Nixon, and sometimes even to Milton Friedman. It referred to a period in the 1960s when it appeared that by fiscal policy alone, the economy could be fine=tuned to produce prosperity without the devastating busts of the pre-war years.

The stagflation of the 1970s and the rise of pro-business chairs in leading universities created the conditions where the orthodoxy had to be rewritten. And the orthodoxy of the times was Keynesianism. Or was it? Joan Robinson -- a collaborator and associate of John Maynard -- called the triumphal strain of economic thought "Bastard Keynesianism." This less than enthusiastic endorsement indicated the belief by her and others that the grafting of some of Keynes ideas onto the classical assumptions of competitive markets and tendency toward equilibrium were not entirely legitimate.

The financial side of Keynes was largely rejected in the climate, in favor of fine-tuning output or enlightened stabilization policies.

In the so-called Neo-Keynesian school, Keynes predictions of wide swings in aggregate demand were converted to fine-tuning. His colorful concepts like animal spirits fell under enlightened stabilization policies.

In the most direct line of transmission of Keynes's insights, the so-called Post Keynesian school, retained the emphasis in the original. Financial relations could cause volatility in investment and in the macro economy.

In the 1980s, a school with the unfortunate name New Keynesian arose. It retained the marriage, however illegitimate to Joan Robinson, to the classical principles, and sought to solve the bad match to empirical evidence by examining so-called "Market imperfections." An example is Joseph Stiglitz [so beloved of Demand Side] whose work on information asymmetries exposes a deep market imperfection. One so deep as to be lethal. In fact, the term "market imperfections," indicates the potential of more or less mild remedies to an otherwise smooth-functioning machine. The term market failures is better, but market fatal flaws is perhaps best.

Other New Keynesians might include Paul Krugman, whose fascination with the zero bound on interest rates suggests that a technical problem limits monetary policy, when post-Keynesians, or at least Demand Side, suggests monetary policy is swamped by enormous debt and only when debt levels come down to about half their current level can traditional monetary policy have an effect again.

Hyman Minsky is one line of direct transmission of Keynesianism. It should be called financial Keynesianism, and we saw in David Levy's comments in today's podcast some absurdities of orthodoxies which basically ignore profit, debt, balance sheets, asset prices, and so on. Minsky saw apparent stability and prosperity as the condition which produces excess leverage and ever more fragile financing structures. The two powers of the central bank and big government can right a listing ship with bail outs and deficits, but do so at ever greater costs in ballast. That ballast eventually finds its way above deck. Sooner or later it has to be removed.

The effect of finance on demand has been illustrated by Steve Keen. Keen points out simply that delta demand equals delta income plus delta debt. The change in demand is composed of the change in income plus the change in debt. The demand side of booms is fueled by increasing leverage. The demand side of busts reflects declining or even simply stagnant changes in debt.

Demand Side as we practice it uses the multiplier to show that growing leverage means shrinking demand dynamics.

All of which impacts investment. The capital goods sector is the original stimulus sector. When liquidity preference, shrinking capital goods prices, or projected flagging demand for output appear, they appear in the investment goods sector.

Now the Keynesian views of all stripes have to accept that it is not just the level, but the composition of investment that matters. The economy has failed as much by creating MacMansions when we needed climate survival as it has for its misallocation to the wrong line of accounts.

Consumer capitalism which favors private goods has run its course. No Keynesianism will succeed which does not recognize that current failures originated in the pilot's house. Short-term-ism is blindness. And the short-term rules in our current corporate oligarchy. The time is right not for more taxpayer ballast, but for jettisoning a good chunk of dead weight, and rebalancing in lines that are forward-looking and sustainable.

No comments:

Post a Comment