Knowing and Making

It's the one simplest thing President Obama could do to seize control of the economic agenda. It's counterintuitive - but done right, it could be the tonic both for the economy and for a divided political scene. Don't click on your back button yet - I haven't gone crazy. Obama should propose a Balanced Budget Amendment with the following key features: The balance must be achieved over ten years, not one It should include   automatic (not discretionary) investment programmes when unemployment is high, which are scaled down when the economy is doing well It should commit to share the proceeds of future growth between deficit reduction/debt repayment, tax cuts and investment This policy would provide countercyclical intervention - exactly as a responsible government should. Right now, the US economy could use five to ten million more jobs (that's about $500 billion a year, by the way). Five years ago it didn't need anything like that - there was plenty of ...

This evening Paul Mason leads a debate for LSE , the Adam Smith Institute  [ Update : I made this assumption based on the debate being listed on the ASI's "Events" page. A BBC editor has kindly emailed me to correct my mistake. Thanks!] and Radio 4 on Keynes versus Hayek. It’s a good day to talk about it, with UK growth figures coming in at a disappointing 0.2% and a lot of uncertainty about whether public sector austerity is slowing economic growth, or conversely enabling more private investment which will improve things in the long term. [ Update 3 August 2011 : The programme will be broadcast this evening at 8pm UK time, and will be available after that from this address ] On Hayek’s side, Jamie Whyte and George Selgin are speaking; for Keynes, Duncan Weldon and Lord Skidelsky. Do come along if you can, though the event is likely to be full so arrive early (5.30 is suggested). If you don’t get in, come to the Old Bank of England pub on Fleet Street afterwards for d...

Some recent interesting articles: A Physicist Turns the City Into an Equation is a description of an ambitious project by Luis Bettencourt and Geoffrey West at the Santa Fe Institute to develop mathematical models of the behaviour of cities (and earlier, of the physiology of living organisms). They claim to have found some strong correlations in both cases. For instance, a city that doubles in size increases its productivity and economic activity per capita by 15%. And animals that grow larger become more efficient users of energy. However, it's not clear whether they have a real model which explains these phenomena, or just some statistical correlations. Paul Mason went to the LSE and conducted a whimsical interview with the ghost of John Maynard Keynes. As fits someone who changes his mind with the facts, he has grown out of Keynesianism and is seeking a new model which can handle fiat currencies and global finance. An excellent challenge. Another challenge comes from Tyl...

Reader Bill Spight writes from the US, pointing to today's Brad Delong article and asking if I think the British psyche has a special tendency towards austerity. I hadn't read Delong's piece (I find his blog a little too predictable usually, and while I agree with much of what he says, I don't need to re-read the same opinions every day). He is quite right, though, about the Tories' lack of a real economic theory behind their actions. Osborne obviously has some acquaintance with economic theory - though it may be selective. He understands the idea of crowding-out, the impact of long-term interest rates on private investment, and the idea that monetary policy can sometimes compensate for fiscal policy. But the current cuts are more driven by political ideology than economics. Notably, they fail to understand the difference between public borrowing in an economy with high unemployment and output gaps, and in an economy running at full capacity. This of course is ...

From Rory Sutherland , current president of the Institute of Practioners in Advertising: "We need to broaden the definition of what we do to reflect the new reality of the market place because if we don't create a new model based on human understanding, then we are in danger of using 1950's packaged goods persuasive techniques to solve today's communications problems! With behavioural economics we can align ourselves to a recognizable science..." I'm a great supporter of Rory's campaign to bring science into the marketing world - the field today is too driven by gut feeling, and treats creativity as an end instead of a means. Science lets us clearly understand the business problem, create a solution and demonstrate that it will work. I disagree with him on one point in particular, but we'll come back to that. In the meantime, I've been reading Sam Delaney's book  Get Smashed , a history of the British advertising industry from the 1940s onwa...

For a while, I've been storing up lots of links to interesting pages from blogs and other places. I keep meaning to weave many of them into an interesting narrative, but some of them don't quite seem to fit, and yet are still on topics that I'm interested in, namely: expectations (and related, rational expectations theory) sentiment and whether it is real, and can be modelled macroeconomic theory and in particular, under what behavioural or market conditions Keynesian stimulus is efficient Here are some of those links which I'm, realistically, never going to get around to to analysing in detail: Rajiv Sethi on rational expectations and equilibrium paths . A good insight into why the rational expectations model is unlikely to reflect reality. But aren't rational expectations the only way to achieve a stable equilibrium in many models? Yes indeed. The conclusion must be that either those models are incorrect (a cop-out) or that the economy cannot be stable . Th...

A story of how the bank bailout money is providing an indirect stimulus to the economy. Or would do, except that political pressure is stopping the bank from spending it! I think Greg Mankiw posted a similar question last week: Scenario 1 : A bank receives $20,000 of bailout money and hires Joe the Plumber to refurbish its bathroom. Scenario 2 : A bank receives $20,000 of bailout money and lends it to Ted the Lawyer, who hires Joe the Plumber to refurbish his bathroom. Which has the greater macroeconomic effect? At the time I thought Mankiw was implying they were equivalent, but it felt like a trick question. I guess the answer might  be that $20,000 of bailout, by increasing bank capital, actually enables (say) $100,000 or more of new lending. In which case Scenario 2 is preferable. However, I have to ask: is Bank of America supposed to suspend all marketing activities during the course of the recession? Surely their marketing people have done some kind of analysis and decided this i...

Brad DeLong has solved the financial crisis (co-opting the help of Keynes, Bernanke, Trichet, Brown, King, Geithner and Summers). I must admit the conclusion he came to was not the one I expected. Note particularly that: he disagrees with me on crowding-out - he thinks there is still net business investment to be crowded regardless, he believes that business investment will not be a substantial source of demand in the near term That's a bit disappointing, if he is right. I was hoping for a more positive outcome but I suppose that's why it's called a depression.

Just a quick note to point you to a much more detailed analysis of the crowding-out question . As usual on Economist's View, the posting itself is good and the diversity and depth of thought in the comments are perhaps even better. I can't think of another blog anywhere in the world where that's true.

I read Paul Krugman's latest NYTimes column (via Economist's View ) and it got me wondering. Why does crowding out not happen? In other words, why does an increase in long-term public debt not result in a reduction in long-term business investment? There's a school of thought which argues that there is money which would otherwise go into productive private investment, but instead is diverted into lending to government (which is likely to lead to less productive spending). Due to less money being available, this pushes up the price of borrowing for businesses and means some otherwise-viable investments will not happen. Krugman gives part of the answer - that a (successful) stimulus encourages economic growth which in turn makes business investment more, not less, likely. But there's another reason. This is that business investment is not  happening anyway. There is not a large pool of money going into long-term business investment now. Why? Because investors weight shor...