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, January 22, 2013



Barack Obama, 2006, in an interview with Tom Ashbrook and On Point.

I play this for you this morning because he told us right there what he was going to do and who he was.  The passing of universal health care was itself progressive, no matter how it was designed.
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Barack Obama is a bright man.  Brighter and more articulate than most of us, certainly than me.  herbert Hoover was a bright man, the whiz kid of the Republican party, commerce secretary.  If any body could do it, Herbert could do it. He comes down to us today as a stubborn, baffled bureaucrat who could not see the obvious.  Obama will become O'Hoover.  He cannot see the difference between single payer and corporate give-away, the need to attack climate change now when we have idle resource is not one he admits, the essential madness of austerity is treated as something in need of political compromise.  Is that old-time religeon, or is it a clear look at the world.

The point here is that Obama did not experiment to see what worked, as did FDR after Hoover.  Obama instead adopted the corporate preference plan, in health care, for Wall Street, the banks, the Energy Complex.


Now that part I agree with.  The country values a fair political process.  It is broken, I hear the polls telling me.  Not sure I hear Obama.  People are wanting to protect the environment for their children.  Doesn't seem to play.  Jobs are more important than deficits.  Not in the White House.  Social Security and Medicare -- they need to work for me says the common man and woman. ...  Just saying.

The inauguration was beautiful, though.

This week's post at REMacroBaseline.com is a short form of our paper entitled "Productivity, Unemployment and the Rule of 8" to be published in the upcoming issue of Real World Economics Review.  The premise is, and the evidence supports it, that in the medium and longer terms productivity varies inversely to the unemployment rate.  Unemployment goes down, productivity goes up.  Unemployment goes up, productivity goes down.  The chart has absolutely sinuous, I mean perfect, symmetry.  The R-squareds are okay.

Why?  Because, following from the first law of economics, when a resource becomes more scarce and expensive, its use is husbanded.  When labor is scarce, managers manage, workers are shifted to more productive tasks, productivity goes up.  And vice versa, when labor is plentiful and cheap, no new machinery or system is installed, run with the old.

Sounds sensible, but it is exactly the oppose of conventional wisdom, which says that in periods of high unemployment workers fear for their jobs, managers speed up the line, productivity goes up.  And in periods of low unemployment additional workers don't add as much to output as previous workers.  The law of diminishing labor productivity or diminishing marginal returns.  A law that is valid in only a limited number of cases, and certainly not in the mainstream industrial or service sectors.  Maybe in 19th Century agriculture.

Our paper touches on the Phillips Curve and NAIRU -- the non-accelerating inflation rate of unemployment -- and on the centrality of inflation to the orthodox economic mind.  The Phillips Curve is basically the notion that there is a trade-off between output and inflation. NAIRU defines a "natural rate" of unemployment by its effect on inflation.  And you get the Fed governors wrestling over the interest rate button.  Half of them think that as soon as inflation kicks in it will be too late, the fire of higher prices will burn out of control.  The other half think, No, at the first sign of inflation we can boost interest rates, sell our massive stock of bad mortgage securities, eat up the loose money and forestall that hellfire.

Even if the quantity theory of money upon which the strategy depends were not bogus to start with, there are other problems.  Neither half has thought this through.

The kind of inflation that higher interest rates could affect is demand-pull inflation, which is nowhere on the horizon, and if it were, we should welcome it.  It would mean full employment and renewed investment.  Instead what upward pressure there is on prices comes from cost-push inflation.  Particularly the inflation of commodity prices via the Fed's cheap chips for commodity speculators.  It is possible higher interest would reduce speculation, but higher interest is a cost that might also be added to prices.

The concept of potential GDP, potential output, is also dependent on inflation.  The idea being you know you're at potential GDP when inflation kicks in.  Phooey.  That inflation could very easily be temporary.


The most profoundly disappointing experience of the financial crisis for me has been the manifest failure to learn and adapt.  We have wasted a perfectly good crisis.

Demand Side has been laboring in the dark for many years, out of the mainstream by our choice to not accept absurd assumptions like perfect competition, the quantity theory of money, and house prices ballooning far beyond the incomes needed to afford them.

We saw in the Great Financial Crisis and the Great Recession not so much a validation of our sophisticated understanding, because it was not so sophisticated.  What we saw was the certain destruction of Rational Expectations, Monetarism, Market Fundamentalism, Neoclassical or so-called New Keynesianism. And the opportunity to grow in sophistication by learning from those who were right, from Dean Baker to Nouriel Roubini, George Soros, Steve Keen, James K. Galbraith.

Plug -- all those except Dean Baker have chapters in the Demand Side Book -- demandsidebooks.com.  And there was a lot to learn. Very gratifying.

But the destruction of the concepts and ideology in power that created the crisis and creates its subsequent stagnation littered with further crisis has not occurred.  Instead the politicians are arguing over how many limbs we should amputate to cure this case of malnutrition.  And the Wall Street types are blaming the politicians, while their lobbying continues unabated.  Obviously the funding ...   Banks continue not to function, pretending to be functional while collecting their back-door bailouts and continuing their nights in the casinos.  Employment continues to falter.

Why is that?

This question:  How can we have failed so miserably to learn from this great opportunity to learn?  It is not enough to wring our hands here at Demand Side and blame the obtuseness of men.  We've come up with some answers.

One, policy and practice that does not learn is well-funded by entrenched interests/ , the same interests that endowed the chairs at Harvard and Stanford in the pre-crisis to promote the error are still there, and they are still funding.  We think also of the Fix the Debt folks funded by Pete Peterson's billions.  Same message before the crisis and after.  Just change the wallpaper.  The banks and Wall Street, primary employers of economists or at least people who speak Economese; no interest in admitting banks are not functioning and need to be broken up. And we mentioned the academics who built fine careers and occupy endowed chairs, who have no reason to change their minds -- other than intellectual integrity -- and actually a lot of reason not to change them.

Two, the same funding is active in politics.  Money is power, money flows to power, power flows to money. However you want to phrase it. Campaigns are more for donors than for votes.  And the chosen policy simply finds its sympathetic economics.

The parallel to climate change is instructive.  Here, I would argue, the science was convincing for a decade before serious scientists started waving their hands.  There were academic positions to be protected and to intrude upon the TV watching public with apocalyptic warnings is just not in the DNA of many intellectuals.  But eventually -- I would say too late -- the scientific bodies came out forcefully.  They were frustrated by the political dynamics, and now we are off the climate change cliff.  Soon to 400 parts per million. That is the tragedy there.

The tragedy in economics is that it is bound up in world views that make the warnings of the serious seem like just another interest group  trying to get the goods.  So the talk has gone from how great the free market is to create all this housing wealth and aren't these financing innovations great TO "It's all just a minor blip," TO "Oops, Nobody saw this coming," TO "It must be the government's fault, but by the way the government needs to bail out my bank," to "We're going to rebound quickly," TO "It really was the government's fault and if they would just get out of the way the business confidence fairy would visit again," TO "It has to be this way, -- this stagnation is an inevitable and necessary phase to recovery because those bad mortgages have to paid off and we need to cut government at the same time."  The whole sequence without re-thinking the economics that created the mess.

And here is where Demand Side has to look in the mirror again.  We have our model, getting better all the time, but a model -- an explanation -- of how the economy works.  We love our model.  Those folks over there have their model -- the Market Fundamentalist model.  They love it.  It was good to them.  When it is threatened they cling to it as a part of themselves, because it is their explanation of the world.  Without it, the world does not make sense.  It is like walking on the ceiling.  It is as fundamental as a religious explanation.  It IS a religious explanation.  We can expect the roads to crumble and the land to melt into the sea before we experience any substantial conversion by these fundamentalists.

Maybe that is not so profound an epiphany on our part.  But we do think it points to where the debate should be directed.  Not at the academics, nor necessarily at the halls of Congress, but at the informed, interested, educated and alarmed population which has not been trained in hyper-conservative economic fundamentalism and to whom it is not a pillar upon which the world sits.  To some extent this group -- this very large group -- is the Occupy movement, but it should also be social insurance advocates, climate change activists, people who need jobs or better jobs, students, people who need government to work.  And these folks ARE coming up with the same sometimes obvious answers that economists who learned from the crisis advocate -- put people to work in green jobs or stop coddling the banks who caused the mess or don't cut education and transportation funding, it's good for the future and for the present in terms of jobs.

We do believe, however, that Demand Side can help. And we should crawl out of our own laboratories and start waving more vigorously in the public square.  You can help us with that, if you haven't already, by posting a rating or leaving a comment on the demandside podcast page.  This would be the demandside one word page.  Either is good, but new listeners would be better served by is we kept them off the demand side economics legacy page.

These are once weekly low volume sources of perspective.  And our model IS informed by the real world.

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