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    09/28/2010

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    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?

    Brilliant.

    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.

    Thanks.

    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 With this outdated market paradigm, we have not created enough jobs for middle- and lower-income people.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 http://savingtheworldeconomy.blogspot.com/2010/09/overcoming-economic-si...
    The Current Economic Recession, Analogous to a Serious Diabetic Disease http://savingtheworldeconomy.blogspot.com/2010/09/current-economic-reces...

    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:

    http://www.c-spanarchives.org/program/ID/714&start=1160&end=1210

    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).

    Maxine

    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

    http://www.finance-insurance-loans.com/tag/tim-wallace/

    BTW, Krugman responded to you (with a link!) at http://krugman.blogs.nytimes.com/2010/09/28/structural-problems-not-structural-unemployment/

    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

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