Sunday, January 11, 2009


The Levy Economics Institute of Bard College is an excellent independent source for no-fee information and analysis. Leon Levy, a/the founder of the Oppenheimer family of mutual and other funds, emphasized the importance of profits in economic analysis, and left among his legacies the Levy Institute, which has many activities and is worth visiting on-line periodically. Two recent analyses should be looked at:

Strategic Analysis from this month: "Flow of Funds Figures Show the Largest Drop in Household Borrowings in the Last 40 Years". The Levy Institute's Economic model projects that this sort of drop in borrowings will have long-lasting effects.

DoctoRx comments that we should accept that too much "growth" has been created by borrowing and lending. We need to "sacrifice" (in Mr. Obama's term) growth for a restoration of a more reasonable debt level.

Strategic Analysis from December 2008: "Prospects for the U.S. and the World: A Crisis that Conventional Remedies Cannot Resolve". The first sentence reads:

"The prospects for the U.S. economy have become uniquely dreadful, if not frightening."

The second sentence is not much more hopeful:

"In this paper we argue, as starkly as we can, that the United States and the rest of the world's economies will not be able to achieve balanced growth and full employment unless they are able to agree (upon) and implement an entirely new way of running the global economy."

DoctoRx here: I am not an economist, but the record of independent experts such as those working at the Levy Institute over the past two years gives them real credibility. In contrast, the Fed, the Congressional Budget Office, the White House, and Wall Street have, let us say charitably, missed the boat. So I'll give an unhappy thumbs up to the above.

In addition, there is a Working Paper at the Levy Institute from August 2008 titled, "Keynes's Approach to Full Employment: Targeted or Aggregate Demand?"

Here is the abstract:

"This paper argues that John Maynard Keynes had a targeted (as contrasted with aggregate) demand approach to full employment. Modern policies, which aim to “close the demand gap,” are inconsistent with the Keynesian approach on both theoretical and methodological grounds. Aggregate demand tends to increase inflation and erode income distribution near full employment, which is why true full employment is not possible via traditional pro-growth, pro-investment aggregate demand stimuli. This was well understood by Keynes, who preferred targeted job creation during expansions. But even in recessions, he did not campaign for wide-ranging aggregate demand stimuli; this is because different policies have different employment creation effects, which for Keynes was the primary measure of their effectiveness. There is considerable evidence to argue that Keynes had an “on the spot” approach to full employment, where the problem of unemployment is solved via direct job creation, irrespective of the phase of the business cycle."

This interpretation appears to argue against the Democratic effort to more or less throw a lot of money in a broad-brush fashion at construction jobs and other politically-chosen priorities. It supports the contention made repeatedly at this blog that the political process has failed us. Neither Congress nor the Bush Administration, nor the Fed, appears to have taken this credit crunch/financial crisis seriously enough to do real research and develop a coherent plan.

This perspective is supported by the first Strategic Analysis linked to above. If a relatively mild drop in consumer borrowing, to a historically very high level, can produce a long-lived drop in GDP, then society needs to move rapidly to develop plans for where to put its efforts, but can take the time to think this through. (Congress should have been doing this for many months by now.) Moving to a lower-debt economy will be good in the long-run, but will be associated with a slow economy for years to come. In that situation, what is needed is to do what doctors do all the time: triage. In the economy, the clear emergency is the imploding financial system (see yesterday's post, Hex and the Citi). Almost everything else is secondary.

I hope that Team Obama and Team Congress recognize this.

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