Monday, 4 February 2013


Quick post: Through Tyler Cowen's Marginal Revolution, I got to see John Cochrane's recent discussion on why we're stuck in the mud, economic growth-wise:

And it pissed me off!

Sure, Cochrane says a lot of interesting things and the whole article is well worth reading in greater details (You can get a feel of why Keynes hated the neo-classical synthesis of his ideas and why some 'neo-keynesian' schools have not much to do with Keynes' ideas).

But what astonished me was the conclusion: To quote "The relevant choice today is between the first two alternatives. Are we in a situation where the long run is just fine, but the zero bound is forcing us to have too high interest rates, so consumption growth is too high and the level is depressed? Or are we in a situation that consumers doubt the long-run productive capacity of the economy, and are consuming little today because they expect to consume little tomorrow and little 10 years from now?"

1- The alternatives are not mutually exclusive. We can be screwed in the present and fucked in the future.

2- Do these brilliant academics even live vaguely in the real world or know anyone who does? Why don't I consume more? Well, I'll tell you why.

a- I am not spending because my prospect of earned income (salary growth) either sucks or is utterly volatile and I wouldn't bet on its shape i.e. I might earn a decent salary in the future but I am not going to spend that until I actually get it because the future is too damn uncertain. 

b- With interests nearing zero, any savings I might have  are unlikely to produce any money worth spending.

c- Most people also suffered a pretty brutal negative wealth effect with house prices tumbling fairly brutally. And the stock market being flat for nearly 10 years is not helping.

d- I am pretty sure that western states will not be able to honour their commitment to me with regards to retirement and possibly health care provision i.e. as I get old, I suspect I will be on my own.

e- I am also pretty sure that western states will keep on taxing my middle class butt to pay as best they can for the tax breaks and largesse they gifted to their very rich buddies and industrial barons.

Can you say "the consumer is facing some pretty severe headwinds?", Mr. competition sailplane pilot?

Where I differ is that, as opposed to Dr. Cochrane, I don't think "fixing the future" means  "the shocks to long-run productivity (ed. bad policies) are staring us in the face".

In the comment section, Dr Cochrane complains "Is there a country anywhere that is deregulating, lowering marginal tax rates, and liberalizing?"

Errr... All the Anglo-saxon countries in the past 30 years?!?

FFS. Fixing the future should mean 'giving back to the middle class some income growth". Do that and watch your log consumption curve rally back.

As to long term productivity being the key and 'demand' being a side-show? (Dr. JC in the comment section says "In fact, once you start thinking about long-run productivity, the whole consumption business becomes a side show. What matters is detailed understanding of long-run productivity. Once you don't care about "demand," the time path of consumption is not really that interesting"). Well, that's kinda true, you know. Except when long run productivity gains keep on being hoovered upwards.