Saturday, November 20, 2010

DeLong: Good News and Bad News

From a lecture by Brad DeLong for his Econ 1 course at UC Berkeley. He is dealing with "depression economics" and specifically on how you can have a period where high unemployment...
Why should there be such crashes in the level of employment? How can it be that there is not enough spending, not enough demand in the system to put everyone who wants to work to work productively? Back in 1803 Jean-Baptiste Say observed that nobody makes except to use or to sell. and nobody sells except to buy. Thus, he argued there can be particular shortages of demand in some commodities balanced by excesses of demand for others. But “overall excess demand” is self-contradictory because everybody’s spending is someone else’s income and everyone’s income is then spent sooner or later on something. How is it that the economy can wedge itself into a position like it is in today? That is an important question.

And this question has an answer. The answer is that what we try to spend our money on does not have to be currently produced goods and services. Say’s Law says that if there is excess supply for something there has to be excess demand someplace else in the system is sound. But the excess demand does not have to be for currently-produced goods and services. The excess demand can be for financial assets. People can be trying to switch their spending away from currently-produced goods and services in order to build up the amount of financial assets they have.

That is what gets the economy wedged in a position of high unemployment—like it is today.

This is bad news for Say and good news for us. It is bad news for Say because it means there is a hole in his logic that the market system would always work well on a macroeconomic level. It is good news for us because it suggests a way to cure even a big down turn in employment and production. Such a downturn should have a cure in the form of a strategic financial intervention by the government. Find a way for the government to fix the excess demand in financial markets, and you fix the deficient demand for currently-produced goods and services—you fix the economy.
The above is very clear. It is from a world class economist. But unfortunately the political leadership in the US is not listening. The Republicans are out to lunch loonies whose only economic "cure" is to "cut taxes" (for the rich). But even the Democrats as hopeless. Barack Obama surrounded himself with economists who helped create the Great Recession of 2008, so the advice he got was close to useless and he still hasn't caught on that he was snookered (or, probably more correctly, he knows which side his bread is buttered so he isn't interested in "understanding" economics to come up with correct policies for the "little people" since the big shot Wall Street types who helped fund his campaign are busy telling him that "if only" he pumped another few hundred billion into the Wall Street banks, then everything would be okey dokey).

By the way... go read the whole post by DeLong. This is economics written at a level that everybody can understand. Take the time to read it and digest it. It will make you a better person to understand the one big lesson that DeLong is preaching:
Policy simply has not done enough.
In addition... Brad DeLong recently gave a talk at UC Berkeley which is well worth listening to:
  • The audio for the talk: click here. Listen for minutes 19:00 through 42:00.

  • The slides for the talk: click here.
I think everyone should listen to this Brad DeLong talk. It is very clear about how Obama and the Democrats failed the public at large (and the Republicans sold out "the little people" completely to support their ultra-rich overlords).

The above is from this conference at UC Berkeley with these people talking at this particular session:
New Deal or No Deal?: 3:30‐5:30 – Late Afternoon Session – STIMULUS & RESPONSE: Chair: Neil Fligstein, UCB:
  • Bailouts & Financial Reform – Dean Baker, Center for Economic Policy Research, W.D.C.

  • Battered but Not and Beaten – Brad DeLong, Economics, Berkeley

  • Is a New Financial Order Possible? – Barry Eichengreen, Economics, UC Berkeley

  • Job Creation & Destruction – Jesse Rothstein, Public Policy, UC Berkeley

No comments: