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Monday, June 28, 2010

I am calling it: we are in a depression

Kudos to someone who usually I don't agree with for calling this a year and a half ago, but I feel comfortable, now half-way through 2010 declaring that we are in a depression.

Economists have no quantitative definition of depression (which is ironic given that mainstream econ is nothing but a series of mathematical definitions and assumptions). Some say it's only when GDP fall by double-digit percent points, others have other definitions, still others have no real definitions - stating that the 1930s were the one and only 'depression'.

I would personally like someone to come up with the 'richter scale' for recessions...or at least the terrorist color grid: Code yellow, code orange, code red - defined by unemployment, underemployment, under-capacity, bank reserve hoarding...some combination thereof.

But, absent this, I would like to offer the following definition:

A DEPRESSION is "where unemployment or GDP growth is under typically defined 'full' levels for a period of time that exceeds the norm of the generation."

For my generation, the average economic recession lasts less than a year. This recession has gone on for 2.5 years SO FAR - with no turnaround yet projected for employment for months to come yet. Hence, we are in a depression. Maybe you are thinking, 'well duh.' If so, good for you. You shouldn't need someone like me pointing out the obvious to you.

Sunday, June 20, 2010

BP Debacle: Relearning a Lesson from Karl Marx

Karl Marx's dream of capitalism dying off to be replaced by a more utopian existence never really happened, and never will happen, largely because for all it's faults, capitalism works.

That being said, the BP oil spew can teach us of the primary lesson that Karl Marx taught which still holds true - labor has been and will always be exploited to some degree under capitalism.

Now, we can differ in opinion on exactly how/what is being exploited by the capitalist (business) on the laborer (the average Joe), but this exploitation can explain why some people are expressing reservation about talking down or financially hurting BP, despite their obvious failures. The reasons often provided often come down to just one thing: 'Americans work for BP, we are dependent upon them and other oil companies to live.' I like to imagine that Marx might be able to translate were he alive:

Capital is dead labor, which, vampire-like, lives only by sucking living labor, and lives the more, the more labor it sucks.
-Karl Marx, "Das Kapital", 1867

Wednesday, June 9, 2010

Liberals flunk mainstream econ? Or conservatives don't look outside the theoretical box?

Zogby released stats showing that liberals / Democrats have a huge lack of economic understanding compared to their more conservative counterparts. Daniel Klein recently wrote a WSJ op-ed about this which my friend asked me to comment on. My comments are as follows:

I disagree with Mr Klein, and appears my point of disagreement is largely with his statement,
To be sure, none of the eight questions specifically challenge the political sensibilities of conservatives and libertarians. Still, not all of the eight questions are tied directly to left-wing concerns about inequality and redistribution. In particular, the questions about mandatory licensing, the standard of living, the definition of monopoly, and free trade do not specifically challenge leftist sensibilities.

Having just glossed over the full Zogby questionnaire, I would still offer that perhaps these questions do more at highlighting philosophical / political differences than economic intelligence. I suspect that many liberals felt their core identity would be threatened if they didn't answer in ways that were sympathetic to their core beliefs. It is a strongly known psychological fact that when our basic beliefs are threatened, so are our identities. For example, one of the questions was "Third world workers working for American companies overseas are being exploited, agree or disagree...?" Liberals of course would agree statistically compared to conservatives - to do otherwise would suggest an attack on their identities, whether they were technically correct or not from an economic point of view. The issue is NO issue should ever be looked at STRICTLY from a mainstream economic point of view - which is precisely why this study is hogwash. To say liberals don't understand economics is an assumption. One could just as easily say, based on the data, that liberals don't see answers as being black-and-white or defined by just one method of study.

Other questions like, "minimum wage laws raise unemployment, agree or disagree?" is just as problematic, if not just for the fact that many economists (some even in the mainstream) have done studies suggesting that unemployment rates are negligibly or not affected or in some cases enhanced in the long-run with minimum wage standards. Mainstream economic theory says "agree," but it's not a fully testable hypothesis since unemployment and wage levels are not set in an experiment that mimics real life. Obviously liberals, who believe that there should be minimum standards of earnings would "disagree." And as I mentioned in the above paragraph, they might disagree regardless of whether or not they are technically wrong or right because they might view the issue of wage rates as affecting things other than unemployment - like creating a better life for workers that might otherwise be below the poverty level. It's a matter of framing, and of looking beyond textbook economics.

My final issue with the study and the op-ed I can explain by talking about another question that was asked: "Overall, the standard of living is higher today than it was 30 years ago, agree or disagree?" Mainstream economics of course shows that it has - unequivocally...based on the following assumptions: (1) that standard of living is defined as income per capita growth, (2) that income is defined by GDP, (3) that GDP is solely and sufficiently representative of income, and therefore standard of living, and on, and on ....

I teach in my class that many heterodox (outside the mainstream) economists have come up with other tools, besides GDP per capita growth to measure standard of living. One has to take into account resource depletion, externalities, inequality, number of work vs. leisure hours....

So do liberals lack a solid economic education? Or do they just see things other than the bottom dollar as being important? The flip-side question is, are conservatives too ideological/theoretically driven? Do they think outside the box?

In the end, this study doesn't really highlight which group knows more about economics, it highlights how ideologically one-sided and shallow the current state of mainstream economics is.