Friday, 19 February 2010

Athens in Wonderland

Have a look at the following very odd statement from Laurence Kotlikoff in the Economists' Forum. He is suggesting that Greece does not need to devalue, because its prices and wages will quickly adjust regardless:
In the US...the past two years has seen essentially zero inflation leaving prices today substantially lower than where they’d be today had there been no recession.
This is hardly evidence of sticky prices.
I find it difficult to interpret "zero inflation", and prices exactly where they were two years ago, as anything other than evidence for sticky prices.

He then goes on to address the important question of sticky wages in exactly the same way:
Nor is there strong evidence that wages don’t adjust to market pressures. In the US, median real wages have hardly moved for decades
Huh?

I haven't seen the new Alice in Wonderland film, but I have the feeling this must be what it's like. Syllogisms whose premises and conclusions point precisely in opposite directions.

The best thing about Alice in Wonderland is its surreal sense of humour. Kotlikoff has mastered this too - here is his proposal for what Greece should do about its problems:
Specifically, the Greek government would decree that all firms must lower their nominal wages and prices by 30 per cent, effective immediately, and not change them for three months. After three months, everyone would be free to put prices and wages back up.
Beautiful! He tops it all off by asserting that this is all based on what "as economists, we know" to be true.

But one solemn moment of self-awareness upsets the illusion:
Like many quick ideas, this one may have serious flaws
Oh, Laurence. Don't talk yourself down. Flaws are not what this idea has. What this idea has, is on another level entirely. Just think of yourself as a Robin Hanson for macroeconomics. In true Hansonian style, this is a thought experiment designed specifically to expose its own absurdity.

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