Notable Quotes

Must Reads

Maxine Udall Twitter Updates

    follow me on Twitter

    February 2011

    Sun Mon Tue Wed Thu Fri Sat
        1 2 3 4 5
    6 7 8 9 10 11 12
    13 14 15 16 17 18 19
    20 21 22 23 24 25 26
    27 28          

    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.
    Blog powered by Typepad

    « Private Sector Efficiency? | Main | The (Crippled) Invisible Hand »



    TrackBack URL for this entry:

    Listed below are links to weblogs that reference Structural Misalignment and a Counterfactual Economy:


    Feed You can follow this conversation by subscribing to the comment feed for this post.

    is it possible that a counterfactual may exist in other countries not suffering from the same cancerous growth of the financial sector that we have experienced, such as brazil or china, where the recession has barely had an impact? or am i stretching it?


    You may wish to consider using a serif font. It would be much easier to read.

    Brilliant. Just brilliant.

    Completely transcends and reconfigures the parochial economic debate over demand vs. structural features of recession.


    Fantastic article, but here my comments:

    I believe our economic situation is analogous to a serious diabetic disease. If each complication of a diabetic disease is treated separately, the real treatment will escape us. Moreover, it may also cause other potential, perhaps fatal, complications. Again, I ask, doesn't it seem that we have made the same mistakes in the economy over the last several years?

    I believe the operative paradigm of the market has been steadily outmoded over the last 20 years. (This is the real structure problem.) With this outdated market paradigm, we have not created enough jobs for middle- and lower-income people. It means that we have not achieved the level of consumer spending on the demand side that we could have had.

    I am concerned about the economy. Unlike others who share our concern, I have a solution.

    Please take a look at some of my writings in my blog: Saving the world economy: Overcoming an Economic Sisyphean Task – Or, the True Path Back to Economic Prosperity
    The Current Economic Recession, Analogous to a Serious Diabetic Disease

    The "greens", the "sustainability people" have been talking about this for the longest time. You go to shop and see people buying coke/pepsi, cigarettes, potato chips and all the sweet junk food, etc. Is that sustainable aggregate demand? Unfortunately, Krugman does not confront this issue, because that would muddle his case for immediacy; "creating jobs" the fastest, till the next cycle, just a few years down the road. Democratic politicians have done the same thing for a very long time, be patient they say, or, the best is often the enemy of the good, etc.;; the Republicans are despicable of course, playing on the superstitious nature of the general populace, as now. No wonder, many of the products I try to buy are made in Germany!

    My gut reaction is to agree that distorted incentives have been sucking talent into the financial sector. Can you help me understand how that would happen, though? Econ 101 tells me that there should be no difference between the lucritiveness of an industry and the amount of wealth it creates. How has Wall Street cheated the rules of the market? And whose money have they been taking? And how would a government act to prevent this?

    I apologize if these are obvious questions; it's been awhile since I've studied economics...

    Why did the financial sector get so huge? Why did we carry such a huge balance of trade deficit to finance it?

    Who was borrowing a significant percentage of gross national income, forcing the private sector to suck savings from abroad? Who was crowding out domestic savings?

    Paul Volcker said it best:

    The private sector wasn't the root problem. The government was. By all means, let's have the government fix it--but be prepared to raise taxes on far more then the top earners; more borrowing will simply recreate the distortions all over again.

    The author is correct, however, that any fiscal consolidation must be matched with a new, strong source of demand. Whether that be monetary policy and manufacturing or creative, targeted fiscal stimulus I don't know; this is a very, very difficult problem to solve.

    @Myles: Wall Street got the money from our trade deficit, if you didn't guess from my last post :)

    The government had a vested interest in keeping the cheap foreign money flowing, which translated to encouraging overconsumption and giving special privileges to Wall Street, so it could absorb all the capital foreigners were loaning us.

    I don't think it was domestic spending that drove this, either. Our government got an immense amount of international power from running a trade deficit; it propped up the reserve-status of the dollar after the Bretton Woods system collapsed. Look up the Triffin Dilemma someday.

    Ironically, aside from government benefits there are few advantages to such a huge, consolidated financial sector (which is why federal regulators expect it to shrink significantly in the next few years, after the reform bill).


    Nice post. I think you are probably right - and not just about the US. Same trends are evident here in Australia, and I believe in Europe too.

    My take on this would be that markets favour wealthier participants over less wealthy (because they enable economies of scale, and because the wealthy are less vulnerable to small setbacks). This goes back at least to Solon. So widespread markets generate crises of distribution, unless checked by other forces. So Paul is right that demand is depressed, but you are right in that the structure of investment is badly skewed, in consequence of skewed distribution of wealth.

    We don’t have capitalism in the free market sense here any longer……it’s centrally planned…..regulated to the hilt…………in fact look at the attachment showing gov’t spending as a % of total GDP

    BTW, Krugman responded to you (with a link!) at

    I don't know that capitalism in the developed world is the same animal it was, though. Capitalism, it seems to me, is an economic form that is adapted to developing and operating an industrial economy. In the developed world, it seems to be turning into something else, and I'm wondering if the old forms of capital allocation are at all appropriate. Our economic forms may, in other words, be "optimizing" (if that is what in fact capitalism does) things that are no longer of value to us.

    Krugman's response seems to me to be a demonstration of his style of thought, and its limits: finding an essential core, but losing the essential connections in the process.

    He seems to be afraid of confusing people, afraid that people might accept the structural argument, and in doing so, lose focus on the immediate jobs crisis.

    I would take the opposite view. I think Krugman is not persuading enough people, precisely because he doesn't extend his argument, extend his interpretation to take in many more facts and circumstances. What you've done here really does deserve much more attention, precisely because, I think, properly pitched, it would help to persuade more people that we could act responsibly on employment in the "short-term" with fiscal stimulus spending, designed to directly address groaning short-comings in "economic structure".

    Economics really does need synthesis to balance the analysis. Good job.

    Brilliant post & I agree about the distortions. But I am not sure more government is the solution. How would government be able to respond to price signals & allocate resources efficiently if free markets can't (Otherwise Soviet Union will be a success). It seems both free market & govt control economy suffer from principal agent problem. Those in power (doesn't matter gov't or private sector) will abuse the system for personal gain. In gov't control economy it is the bureaucrats. In free market it is the wall st. I think that govt will be even more inefficient in allocating capital as it will be held hostage by vested interest groups. Resulting market distortions could be even higher(e.g. Soviet Union).

    what your country can do for you -- ask what you can do for your country.

    You have to be first, best or differentm

    The comments to this entry are closed.

    Economics Blogs

    • Nancy Folbre - Economix Blog -
      Excellent blog "…where analytical rigor meets a mother’s intuition."
    • interfluidity
      Steve Randy Waldman provides critical insight into and critique of economics, finance, and economists
    • Environmental Economics
      Economists on Environmental and Natural Resources News, Opinion, Analysis (and Other Stuff)
    • Angry Bear Blog
      Slightly left of center economic commentary on news, politics, and the economy
    • Front Page | Institute for New Economic Thinking
      Credible attempts to improve economics will be found here.
    • global glass onion
      Everything macro: the Fed, QE, debt & deficits, FX & and macro issues; banks, banksters & congress critters; the main street economy, including CRE, foreclosures, unemployment, state budgets and health care issues; &global issues, including the Chinese economy, world trade, energy and the environment, and peak oil.
    • Rajiv Sethi
      Barnard College, Columbia U, and Santa Fe Institute economist Rajiv Sethi's thoughts on economics, finance, crime and identity...
    • VOXEU
      Research-based policy analysis and commentary from leading economists
    • The Baseline Scenario

    Health Reform, Health Economics, & Health Policy

    History, Philosophy, Ethics, and Political Economy

    • Salvaged Liberty
      Provocative, thoughtful and well worth a visit.
    • UnderstandingSociety
      A web-based, dynamic monograph on the philosophy of social science and some foundational issues about the nature of the social world.
    • The Barefoot Bum
      Excellent, thoughtful blog grounded in philosophy and not afraid to take an honest girl economist to task.
    • Eyes On the Prize
      Peter Kurze provides thoughtful, imaginative insight and perspective on contemporary issues and dilemmas.
    • How Do You Know?
      I was tempted to place this under aesthetics. A thoughtful blog by Ecrive that roams across a broad intellectual landscape, always with a new perspective.
    • Advice Unasked
      Nice thoughtful blog with political, economic, ethical, and philosophical insights worth reading.
    • Adam Smith's Lost Legacy
      A much-needed website devoted to restoring Smith's legacy as one of our finest moral philosophers.
    • David Coates: Answering Back
      David Coates has created a "living book" that will be of interest to all progressives.
    • History of Economic Thought Website
      Includes links to electronic versions of some HET texts
    • Suburban Guerrilla
      Keeping an eye on the corporate media


    Infrastructure and Housing

    Political Blogs

    The Best of the Rest