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Thursday, March 21, 2013

Transcript: China's property bubble, America's dysfunctional media, and Keynes knows money, too bad nobody knows Keynes

Today on the podcast, a lot of audio, China's property bubble, America's dysfunctional media, and Keynes knows money, too bad nobody knows Keynes
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First, Gillem Tulloch of Forensic Asia, Limited. Is there a real estate bubble in China

"Forensic's Talloch.

Gillem Talloch,whose business Forensic Asia is apparently also known as Private Equity International.

Now. When we last spoke, I uttered some apocalyptic warnings about bread and circuses, or maybe about media and our focus on contests to the exclusion of substance. Here is an exchange from On Point with Tom Ashbrook, illustrating my point if not proving it. We begin with a caller prodding the two news mavens in for the Week in the News roundtable.

Gustavo 22:08

The whole budget disaster is a media disaster as well. The media begins with the uncritical acceptance of the frugal householder metaphor. The government is seen to be no different than a household or business who, when times are tough, needs to tighten his belt and cut back on the spending. Instead the economy is a family farm, as Robert Shiller has said, and when winter comes or the ground is too wet to plow, you don't go inside and sit by the TV, you fix fence or roads or build a new barn or work on the well. A farmer who tightens his belt by failing to use all the labor available is not going to survive very long.

But there is a more dangerous metaphor. The contest. The media is preoccupied with who is going to win, that is what is news. Boehner and Ryan or Obama and Murray. Tag team. The media is not concerned about who is right. That is, they are not concerned about the issues. The issues may tail in with polling results, but always as sound bites. And I am, too, or at least I tend to get on my high horse and want my team to win. Now you have the two sides.... Ooops. There are not just two sides. Indeed, Obama and many Republicans are more on the same side than Obama and the Progressive Caucus. The need to have just two sides means there is a lot of discussion that doesn't get discussed. And as to who is right. Nobody is right all the time. Even Demand Side. But at least we're looking at the issues and the evidence and not just the colors of the teams.

Indeed, the Congressional Progressive Caucus budget, which they call "The Back to Work Budget," is a great proposal. I don't remember if I pitched it last week, the link is online. I'll tick off a bit of it in a moment.

My point is that Gustavo is exactly right, and xx makes his point for him in her long-winded defensiveness. It is about the teams and the players, not about the issues. It's about Red vs. Blue, not about what will work, or even what the American people think will work.

The Ryan budget: Lighten the load by throwing the engines and the fuel overboard. The Murray budget: No, just throw the fuel overboard. You might think the media would have a role in pointing out that budgets don't balance in a downturn. Doesn't work. Look it up. Pretending it will work this time is not going to make it work. So. Not that I have time, but this is good. The back to work budget:
Job Creation

• Infrastructure – substantially increases infrastructure investment to the level the American Society of Civil Engineers says is necessary to close our infrastructure needs gap

• Education – funds school modernizations and rehiring laid-off teachers

• Aid to States – closes the recession-caused gap in state budgets for two years, allowing the rehiring of cops, firefighters, and other public employees

• Making Work Pay – boosts consumer demand by reinstating an expanded tax credit for three years

• Emergency Unemployment Compensation – allows beneficiaries to claim up to 99 weeks of unemployment benefits in high-unemployment states for two years

• Public Works Job Programs and Aid to Distressed Communities – includes job programs such as a Park Improvement Corps, Student Jobs Corps, and Child Care Corps

Fair Individual Tax

• Immediately allows Bush tax cuts to expire for families earning over $250K

• Higher tax rates for millionaires and billionaires (from 45% to 49%)

• Taxes income from investments the same as income from wages

Fair Corporate Tax

• Ends corporate tax bias toward moving jobs and profits overseas

• Enacts a financial transactions tax

• Reduces deductions for corporate jets, meals, and entertainment


• Returns Pentagon spending to 2006 levels, focusing on modern security needs

Health Care

• No benefit cuts to Medicare, Medicaid, or Social Security

• Reduces health care costs by adopting a public option, negotiating drug prices, and reducing fraud


• Prices carbon pollution with a rebate to hold low income households harmless

• Eliminates corporate tax subsidies for oil, gas, and coal companies

The Back to Work Budget creates nearly 7 million jobs in its first year.

Now THAT has a chance

The "shrink your way to growth" strategy reminds me of the Nasrudin story. The Mulla was going to get rich by cutting the food to the donkey. Donkey works hard. Donkey gets thin and thinner. Finally dies. "Damn," says Nasrudin, "And I just about had him down to nothing."

So, went on too long there.

Now. Victoria Chick, author of Macroeconomics after Keynes. Professor Emeritus at University College London. She was there at the meeting called by Joan Robinson and Paul Davidson which gave conscious expression to what became the Post Keynesian school of thought.

We've got her talk transcribed and we're ready to run with it, probably Sunday, as March's Demand Side relay.
Classical economics, or pre-Keynesian economics, models everything in real terms. It’s “real” wages, that is, the amount of goods money can buy, and so on down the line. Money is only brought in at the very last minute to determine prices. So the role of money is separate from this whole analysis of the real economy. It has this little role to play in determining the price level. The term “pure” economics, as used by Alfred Marshall and Walras, meant the economics of this real economy, this barter economy. So by implication money is profoundly “impure,” I suppose.

And the idea was that money was neutral. It didn’t really affect these real relationships. All it did was determine price. Prices could be anything, it didn’t really matter. The real relationships were set up by the system elsewhere, without money, the pure economy, the barter economy, the exchange economy.

This kind of system – dividing the economy between the real and the monetary – was known as the “Classical Dichotomy.” On the monetary side, you had the Quantity Theory of Money. The quantity of money determined prices. Full stop. End of story. Not very interesting, actually, for a role for money.

Now, Keynes showed that the Quantity Theory of Money was based on enormously restrictive assumptions which were very unlikely to pertain in practice. But Milton Friedman – whose name I’m sure you know, too – was able to use the QT as the foundation of his Monetarist revolution in the late Sixties, early Seventies. And as I am sure you know, the Monetarist revolution touched the heart of Margaret Thatcher and found its way into monetary policy.

Monetarism – you may not know, but you ought to – is also the basis for the construction of the euro (Can’t be very good, then, can it?) and determines the way the ECB is doomed to function, and is responsible for inflation targeting more generally in the Western World. And it could be said to be the foundation also of Quantitative Easing, though that interpretation is open to some dispute.

Monetarism and the Quantity Theory of Money and the Classical Dichotomy are all over Western economies like a kind of skin disease. Quite extraordinary. And the Keynesian story, in which money influences everything that happens, has been forgotten, which I think is a tragedy.

Victoria Chick. Look for that relay. Endogenous money may be old news to Minsky fans and listeners to Demand Side, but the discussion is instructive, as it describes and illustrates the sad state of economics as a discipline.

So. Today's podcast brought to you by historical awareness. Has your policy prescription been tried before? Did it work?


  1. Any way I can get to the entire audio of the Victoria Chick lecture?

    btw, tried to post a comment via my iphone, but the web template did not permit me to type in a name and url after selecting a profile. So I moved to my mac.

  2. I'll put that up right now. It promises to overwhelm this month's bandwidth quota on Demand Side, but will be there in its entirety on demandside (two different feeds).