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    Maxine's Essays

    • 21st Century Regress
      Sometimes it seems like the world is going to hell and there's absolutely nothing a girl economist can do about it.
    • What Exactly Are We Crowding Out?
      The current economic downturn isn't a random draw of a black ball from an urn containing white balls and black balls. There's no sampling distribution. Very specific policies and actions landed us here. Now we must decide not only what policies need to be put in place to prevent it happening again, but also what policies would best drive us out of the ditch faster and sustainably.
    • I Wish It Were Only Butter
      We should be giving up some butter if we must. We should not give up education or health investment (or infrastructure or the environment (hello, BP). They may be the only legacies of any value that we pass on to our children and grandchildren.
    • Rational Health Investment?
      The obvious "market solution" is to improve the long run return on investments in health among the disadvantaged through meaningful and effective publicly funded education. The obvious short run "market solution" is to reduce the costs of investment and the shadow price of health for the disadvantaged by providing health insurance cover and reduced out-of-pocket costs.
    • The Socrates Parameter
      To the extent that our limbic systems respond to such engineering by over-riding the judgment of our frontal lobe and to the extent that our frontal lobe is deprived of the information it requires to make a rationally self-interested judgment, we are not only pigs and fools, we are slaves.
    • The Economic Rewards of Virtue
      If individual virtue tempers our "piggy" desires and conditions our choices to something that is both individually and socially better, then the economic rewards of virtue as embodied in and promoted by societal norms and institutions are far greater than we have ever suspected. As economists, we would do well to recognize this when we teach U max.
    • The Market for Morals
      Markets then are places where more is exchanged than goods and services, labor and product, credit, and interest. They are places where we also develop the personal virtues of temperance and prudence and the social virtues of benevolence and justice. When they function well, they produce trust, loyalty, and sympathy among those who trade there.
    • Post-Modern Applied Economics: It’s the Error Term, Stupid
      Maxine believes it’s time to refocus attention and discussion on the error term. It is often where much of the action is in our models. It is where unexpectedly catastrophic events dwell resulting in fat tails. It is where our animal spirits manifest and cause us to do the right thing or the wrong thing or the thing everyone else is doing rather than the self-interested, fully-informed rational thing. It is where God and miracles and chance dwell.
    • Intergenerational Win-Win: Health Insurance, Education, Environment, Infrastructure
      So when we’re talking about fiscal stimulus packages and we’re borrowing from our grandchildren to finance them, we should be thinking about how to use stimulus monies to create value for those grandchildren AND stimulate our economy.
    • Short-term Private Payoffs, Long-term Social Costs
      The real health reform discussion, the one we should be having, is “What must we do to create a health system that is both efficient and fair?” The answer will almost certainly include relegating the private sector to markets where market forces or regulation are effective at aligning short-term private incentives and goals with long-term societal interests. If such markets are scarce or non-existent in health, then the private health sector will be of limited value.
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    Two years ago I got a call from a bank. They were asking questions about a letter I'd written for a client confirming that he'd been self-employed for two years.

    I re-read the letter and it, basically, said "he's human, he gave me two tax returns that indicated he was self-employed, and that he's hired me to do his taxes, but his records were not in order so I had to extend the return."

    He was making $15,000/year as a "painting sub-contractor" for a big builder. I wouldn't have rented him any thing but the smallest apartment.

    The bank financed a $250,000 house. Even though they'd taken his two prior returns and KNEW he was clearly not making any money.

    So when I read about "immorality" I cannot be help to think about these banks and mortgage brokers getting fat on origination fees of loans given to people that could not, under any circumstance, be considered credit worthy for a purchase of this magnitude.

    I've often wondered how overly-dominant companies are any different from overly-dominant government.

    On the other hand, alot of folks in my hometown of Detroit made a good living with a secure retirement during the time-period when the Detroit automakers were overly dominant; foreign competition transformed, e.g., Flint, Michigan from "Wealthiest Middle Class in America" to "Giant Craphole."

    On the other, other hand (yes, my third hand), The gains for the average worker were won in part by unionization. The UAW was a response to the oppressive "Dominant Company" culture in the auto industry. Henry Ford, e.g., kept close tabs on his employees outside of work to ensure they were living "Approved" lifestyles.

    "And I conclude that economic and political power should not be concentrated excessively in anyone's hands, whether public or private, and that a government constituted to be of, by and for the people will almost certainly have to provide some countervailing force against excessive corporate economic and political power."

    Exactly!!! What I can't understand is why so many people think that it's either ONE SIDE or the other that is always the primary problem. For the devoted followers of Friedman, private enterprise is always about freedom and virtue--they have such a high regard for the private sector that their thinking gets completely ridiculous at certain points. Corporations are certainly not completely angelic, ethical entities--and there is plenty of room for power plays and corruption. The Friedmanites are just as blinded as the most devout marxist who blames everything under the sun on "capitalism". I always love folks who are so stuck on rigid dichotomies and absolutes.

    Great post, as usual.

    I think there is an economic fact of life that you are not discussing. There are only 3 ways for the Private sector to de leverage: repudiate debt, have the government run a deficit, or have the foreign market run a surplus.

    This is not a correlate of Keynsiansim but the consequence of the fact that for every sale there must be a purchase. If the private sector deleverages - and thus sells more than it buys - then one of the other two must buy more than its share. Taxes reduce the buying capacity of the private sector. The government must buy more than the taxes taken from the private sector in an amount sufficient to balance the private surplus. Or the foreign market must buy some of this surplus. Purchases must equal sales - by definition.

    Thus debt repudiation is the alternative to shifting the debt burden from the private sector to the government. It causes pain to the lending class - who are of course the moneyed class - who are of course the group in power. Governments don’t like to see powerful people in pain.

    Excellent, insightful post....

    Mr. Knox,
    You touched upon a very key point in your comment. I have been trying to get my mind around this. Those who say we should cut government spending don't seem to grasp this. If the government runs less of a deficit we have to import less and export more (not too likely) or private citizens and corporations have to go into more debt. Am I understanding this correctly? Please elaborate.

    Exactly - it has nothing to do with Keynes - merely that every sale must be accompnied by a purchase.

    An individual can improve his balance sheet by reducing his spending to less than what he sells - typically his wages. He does not realize that when he does this, in order for the economy to pay his wages - someone else must do the opposite - buy more than he sells. In a closed system you can not run a surplus because every sale is balanced by a purchase. In a closed system if I buy less than I sell, someone else necessarily bought more than he sold, exactly in the amount of my surplus. I can improve my balance sheet by x only if someone else reduces his balance sheet by x.

    Right now the private sector is running a surplus of 5pct gdp, the foreign trade balance is 5pct gdp against us and (duh) the govt is running a deficit of 10pct gdp. The sum of this total system must be zero - which it is.

    Conservative dumbnicks point to the fact that when the govt runs a deficit the private ecponomy runs a surplus and erroneously conclude the private economy is saving to pay for future taxes. In fact it merely is that when this end of the teeter totter is up the other end is down. They could theoretically be right, but of course it might be that people are scared and not spending as much as they earn, and to keep them employed the government has them on the dole. That dole may or may not prime the pump - which is a different issue, but it may be better than a revolution. If the govt stopped its 10pct gdp dole the economy would drop by 10 pct and another 10 million or so would be out of work which would scare the beejezus out of the rest who would start to save more - death spiral.

    If the private sector ran a surplus (sold more than it bought) than either the government must have bought more than the taxes it took from the private sector, or the foreign market must have bought from us more thqn they sold to us.

    Excuse - a bit longwinded - easier to write too much than the right amount.


    Martin Wolf did a nice column on this in mid June and another in mid July.

    I'm babbling because it seems that this very simple idea is hidden in a pile of obfuscation when it should be the starting point of all public discourse on the subject of governments role in the economy.

    And I love your essays - you are so on point and have such a nice way of explaining things.

    Pls escuse - above phrased poorly - 97% directed to Allen, last 3% directed to Ms. Udall. Once you submit I dont believe there is a way to edit.

    Thank you for clarifying. A point that confuses me is which way to count the trade balance. If I call the 3 parts of the equation:
    private sector, individual and corporate = P
    Foreign trade= F


    But how do I determine the sign on F? + because foreigners are buying more than they are selling? I can see that if P is saving more than spending, then G must be spending more than saving but fitting F in confuses me.

    Actually, just as I was typing I think I got it clear. P is saving so they are taking money out of the domestic economy. F is removing money also since we buy more from overseas than we sell. So G has to put back in an equal amount. There, does that make sense? You don't really understand something until you can explain it someone once told me. Where are Mr. Wolf's articles available?

    Allen - While you’ve got it right, I suggest you not think in terms of putting money into the domestic economy because you can then get this subject confused with the subject of creating money. Think instead in term of buying and selling.

    P is a net seller, F is a net seller, thus Gvt is a net buyer.

    Note - foreign trade accounts are carried with the opposite sign as you might expect.

    For any market the sales are equal to the purchases. Example - in Dogpatch the sales of vegetables equals the purchases of vegetables. You and I grow vegetbles. I grow carrots, you grow onions. We meet each day at the market and I buy $1 of onions from you and you buy $1 of carrots from me. The gross product in the Dogpatch vegetble market is $2 per day.

    You decide to save money and only buy $0.50 of carrots per day.

    (1) I continue to buy $1 of onions. The gross product has dropped to $1.50 per day, and further I am using up my savings or borrowing somewhere - but that is a different subject. Regardless of how I finance it, the total sales are equal to the total purchases. Note that the only way you can maintain your sales is bercause I am reducing my net worth. Your thrift is causing my unthrift. NOte also that I had to reduce my production which is why gross product declined.

    Maybe an outsider comes along and buys the 0.50 of carrots and does not sell us anything. We are in balance at $2 and your thrift is balanced by the outsiders unthrift.

    (2) I decide to cut my purchases also, and buy $0.50 of onions per day. Now gross product is $1 per day. But note that your sales have dropped so that you are no longer running a surplus.

    A part of market can run a surplus but the total market must be in balance.

    Now switch to a different market - the US market for new things and services - GDP. Same holds.

    Martin Wolf writes a column at the Financial Times - they have a web site

    here is the june 15 essay,s01=1.html

    Happy New Year! The author write more I liked it.

    Happy New Year! Happiness and success in 2011.

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