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Sometimes Y.

It makes no sense as I wrote at

in March 2009. Yet people like to discuss it again.

The taxonomy is incomplete, need to update the alphabet!

Forces which push toward stagnation:
- deleveraging continues
- the crisis has reduced the value of the Fed put on financial market
- no savings
- increased public spending, deficit and debt
- PPI is growing faster than CPI: profit margins are being squeezed again.

Forces which push toward a short-term boom:
- the Fed intervenes: who cares about true sustainable profits?
- The Treasury intervenes: same as above.
- The PPI has dived, so price margins must have recovered, increasing gross profits, at least in the short run.

Forces which push toward a long-term boom:
- none at all on the real side
- if money regains its full efficacy, the Chinese keep on upholding US consumption, and some tech innovation occurs, there's no need for sustainability and efficiency.

Forces which push toward another financial crisis:
- some remaining troubles, probably, but the Fed has eliminated the symptoms of unsustainability.

L is ok, or a U with a very week recovery (more a square root than a U: down, up, stop), a W is unlikely only because the Fed and the Treasury will stuff banks with liquidity and funds if needed.

Pietro and others,

Tyler's analysis was quite fascinating in his analysis of the "jobless recovery". The basic idea is that most of the innovation we have seen over the past decade are not innovations which create jobs immediately, but nevertheless are productivity enhancing. Twitter was his example --- brings world wide flow of information and entertainment, but employs 500 employees total. So in the short run we get increases in well-being and productivity, but not jobs (especially unskilled labor). BUT, Tyler also acknowledged that entrepreneurship is the life-blood of an economy, and that these labor resources will be freed up and reallocated to new enterprises and new avenues of enterprise which we haven't seen yet. Thus, Cowen concluded that one possible path we may go on is a techno-utopia. The other possibility, unfortunately, is a stagnation thesis similar to what Mill laid out. Which one, Tyler didn't really say or give us any probability.

I thought his talk was very thoughtful and brilliantly delivered. You can probably see the video either at Mercatus or at CHSS websites (I don't have the link). I disagreed with his argument about what errors the Fed made, and as such I don't think he answered a question that his own analysis highlights --- why the cluster of errors of over optimism? Yes people got crazy Tyler, but someone gave them the crazy juice. People don't just wake up one day and say, lets go crazy. So what happened? I would put that on the easy monetary policy under Greenspan and continuing with Bernanke. The particular ways in which people got crazy, I would say requires additional factors which steer individuals in this or that direction to get crazy in. Moreover, I don't buy the Scott Sumner argument for what the Fed should have done in 2008. But I do agree with Tyler that Bernanke did better in this job than any of the realistic alternatives. However, my argument would be the same as it was with respect to the efforts to reform the socialist system in the 1980s --- the problem isn't in improving the operation of the system, it is the system. But that wasn't the theme of Tyler's talk. I do hope that the video is made available shortly --- it was a very impressive public lecture.

Is Tyler's lecture available online?

I was a little confused about his connection between "jobless recovery" and innovation. The unemployment rate is high among the poor and low among the rich. He used Twitter as an example, but rich programmers are not the ones unemployed. Are innovations also putting lower-payed construction workers out of jobs?

Twitter seems more like the counter-argument showing how innovations free labor to do other activities, not create entrenched unemployment.

Am I just taking his example too literally?

"but someone gave them the crazy juice"

That's an all-time Boettke classic. I love it!


I wish I could take credit for it, but like with most classic Boettke lines they are stolen from people much smarter than me --- in this case it was Larry White.

Just want to set the record straight. Horwitz already accuses me of stealing his titles and arguments, I don't want to get Larry on me as well. But as I tell Steve --- it is a form of flattery, not theft!!!


G. :-)


Regarding the "crazy juice" and "people waking up one day and going crazy," there is the alternative that they went crazy gradually over time, perhaps sipping crazy juice in small but accumulating amounts over time. The comparison would be the old story about the frog in the pot that is gradually heated up until...

Anyway, the housing bubble began in 1998 and took until 2006, if not early 2007 depending on your data source, to peak, a whole lot of craziness that indeed did build up over a pretty long period of time.

The beginning of the "bubble" looks more like 1999 to me, but that's a minor quibble. The growth in home prices became considerably steeper around 2002. From 2001 through the end of 2002 the Federal Funds rate target fell from 6% to 1.25%.

Cantillon effects aren't so hard to see in hindsight. Hmm... where else have prices risen much more quickly than the general inflation rate? Oh yeah, higher education. Great. Talk about crazy juice, where did people get the idea that spending six years getting a 4-year degree is always and in every case a good investment?

Is the presentation available online?

The roots of the housing and finance crisis began in 1998 with the bailout of Long Term Capital Management and the beginning of the Greenspan Put. There was no downturn in housing in the wake of the Dot-Com Bust in 2000.

Housing prices did take off in the over-heated housing markets from 2002 on. So, too, did subprime loans and ARMs. Lending standards deteriorated.

Easy credit and low interest rates always result in such episodes, from the South Sea Bubble down to the present. The history of bubbles had been well-documented and was generally known by the beginning of the 20th century. Economists differed on the causes, not the facts. Now economists don't know history and argue about the facts as though there is no history.

Bruce Yandle sees a caterpillar shaped recovery -- a metaphor that is characteristic of Bruce's inviting communication style and that also has substantive appeal. I link to a podcast with his remarks here:

The last time I saw BLS data, there were 8 millions jobs lost. 2 were in construction, and 1 in automotive.

Thus, at least 40% of unemployment is the direct effect of malinvestment, without much need for further explanations.

There were other overexpanded sectors: imports, due to the foreign borrowing spree (it would be unlikely to have a 0% net saving rate without the Fed, and this causes at least part of the trade deficit), and financial markets. I have no unemployment data for them, however.

Let say that 50-60% of unemployment is directly related to structural adjustments to distortions caused by ABC-T, and the rest is an aggregate demand effect due to deleveraging (which counts as recovery as much as capital reshuffling after malinvestment) and the financial crisis, and, of course, minimum wage unemployment (most of unemployed are low-skill workers, and min wages have hiked).

I don't see the need for any additional explanation, but history being a complex phenomenon it is likely that more than one causal factor was active at once.

If jobless recoveries are caused by technological changes, why did they get worse in 2007 than in 2000, and worse in 2000 than in 1990?

While ABCT has no troubles explaining why this happened, a "schumpeterian" (probably a misnomer) explanation which doesn't answer this question appears to be ad hoc.

PS: I say automotive is malinvested because it survived its economic usefulness for years mainly due to cheap credit (and protectionism).

The shape of the recovery is V.. so far at least.. I copy 2 graphs of S&P 500.

The first one is from August, 2009. The V shape was dubious at that time:

The second one is from March, 2010. Now it is a clear V shape:


I don’t see how we can talk about real “recovery” until the federal budget deficit falls to sustainable levels where growth outpaces it and the Fed disengages all of its liquidity facilities. The liquidation of Fannie and Freddie would be an important milestone, but that’s unlikely. The fed allowing interest rates to return to a true market rate is also unlikely. So I’ll leave both of those out. No sustainable recovery is possible in the long term with these institutions in place, but so be it.

The current economy seems like a man in a glider, enjoying his flight skills, totally unaware that battery-powered industrial fans are keeping him the air. Eventually those batteries die and his “skill” will be revealed.

I don’t see how the current crop of stimulus-sustained activities will do anything other than crash back down to earth. That suggests double-dip.

So I’d bet on V\? Who knows what will happen after the second dip. Will a new round of stimulus be attempted followed by currency crisis? Will we finally take our medicine thanks to gridlock in a divided government?

Who knows.

We’re always on the go trying to accomplish so much, aren’s we? Getting groceries, cleaning the house, mowing the lawn - there’s always something. It’s so easy to get caught up in everyday life that we forget how simple it can be to bring cheer to ourselves and others.

Wow! Thank you! I always wanted to write in my site something like that. Can I take part of your post to my blog?

don't buy the Scott Sumner argument for what the Fed should have done in 2008. But I do agree with Tyler that Bernanke did better in this job than any of the realistic alternatives.

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