I said huge profits. I got no problem with profits

Define that. When is a company making 'huge profits' versus just plain 'profits'?

What I think you (and other prog-libs) are doing is not complaining about profits per se. You are complaining about HOW the profits were earned. Nothing the banking industry did in the bubble qualifies as illegal so we can't say they are illegal profits. So we enter a subjective arena where profits can be earned legally, but questionably. Apple, Microsoft, Banks, Oil, Tobacco, Green, Food - blah blah blah... Everyone that earns profit is attacked as achieving those profits unethically from some perspective.

The prog-libs claim the banks behaved questionably and so their profits are 'bad'. Brass tacks - prog/libs say the banks should have told people "No" when they applied for loans that they LEGALLY QUALIFIED for. I remember a story in the housing bust of a guy who earned only $45K a year. He bought a million dollar home and was paying for it by flipping 3 other properties. The bubble bursts. Now the dumb sap has 4 properties and he couldn't pay for any of them. He lost his house, all his credit, and had to go live in an apartment. A Prince trying to live on Pauper's income. Who's fault?

In 1995, the banks would have told this guy to jump in a lake. The interest rate was over 9% and the only loan he could possibly have qualified for was one with a payment of no greater than 25% of his gross monthly income. Check the tables to see what he would have qualified for in 1995. Hint: it ISN'T a million bucks...

It changed with Frank's "Uffodubble How-sing" act. The FED jacked around the rates. The FED changed Glass-Steagall. The FED told banks they would back up ARMs and other risky loans. 5 years later in the year 2000 when a doofus walks into the bank there is a smorgasboard of million dollar risky loans he legally qualifies for. When someone qualifies for a loan, and bank refuses, bank gets sued.

Some banks acted conservatively in the bubble and many others chose to do the risky (but still legal) loans. Just like how there were CONSUMERS who behaved conservatively during the bubble, and others who took the risky (but legal) ARMs. The problem was that the number of conservative players was a lot smaller than the risk-takers. The banks were stupid to take so many risks. People were stupid to take out so many loans. Government was stupid for engineering the whole mess. But make no mistake - the primary offender in this picture is the Federal Government. If they had not interfered in the market, then the whole mess would never have happened.

The government forced them to create CDO's? to bundle up non-AAA holdings and sell them as AAA? to extend themselves beyond their ability to cover their loses?

In a word - yes - the government forced the issue. Before the government interfered, lenders had actuarial tables and KNEW with 100% certainty who could and couldn't afford a loan the second they walked in the door. Mortgage rates were in the 8% to 10% range. Banks 'made' money on loans with the interest. People who earned less than 30K a year had a tough time getting into a house because (DUH!) they didn't really earn enough money. It was common sense. People that were POOR couldn't just go out and buy houses willy-nilly.

Then the government came along. They wanted people to get loans cheaper and more often and entirely for political reasons. But banks aren't charities and if they can't make the money on the interest (which you can't with sub-prime) then how do you make money? Hmmm... Oh yeah - let's get rid of this little thing called "Glass Steagall"! Now let's use the Fed to jack around interest rates until they are below 5%. Now you banks are commanded by government to make your profits by bundling the loans as derivatives. Now it is almost impossible to survive as a lending institution without doing what we tell you. Oh yeah, you banks? When it all blows up down the road it is YOUR fault... There you go banks!

That was government meddling with the market. They changed the rules so Barney Frank could tell voters that they had "UFFODUBBLE HOW-SING!". It was true left-wing, neolib stupidity on parade and it screwed up the entire planet. They were the ones that changed the laws. The private sector had no choice but to react to the rules that government barfed up.

The system that GOVERNMENT established turned the housing market within a very short time from a staid system of "moderate loans paid off by interest" into a crazed gold-rush of "cheap loans for everyone paid off by bundling". Banks had no choice to play that game because that was playing field that GOVERNMENT created. Any bank offering a SANE loan at an 8% interest rate and making its profits over 30 years was getting clobbered by lenders handing out loans at 2.5% ARMs that were making a bundle on the back end. Banks knew it was crazy, but those were the rules that GOVERNMENT set up and they didn't have any choice but to operate within that rubric. But government said, "Hey - if the loans blow up don't worry about it! We'll cover those bad loans with Freddie/Fannie and you won't be on the hook for it..." Government.

You see, that's what that happens when government interferes with the market and picks the winners and losers by changing rules, laws, and policy. The whole thing would have been impossible without a corrupt government starting the ball rolling for political purposes.

Everybody on the planet learned after the Great Depression that having an 'environment' where bundling and other such investments could exist was not good. That's why Glass-Stegall was created. It stopped a BAD investment practice and it worked for over 50 years without government being "involved" in a single, bloody thing. That's what !good! government does. It establishes a simple, basic set of rules and then STOPS INTERFERING. The reason for the housing failure was not because government WASN'T regulating the market. It was because the government WAS regulating the market in a terrible way.

Reinstate Glass-Steagall - a common sense law - and then ban the government from EVER interfering with the housing sector again. Things work just fine when you set up a simple, transparent system and then forbid the government from coming within a million miles of it.

Just so people aren't confused, Fiscal policy ≠ Monetary policy.

Fiscal policy = Congress = taxation, spending, and regulation.
Monetary policy = Federal Reserve = interest rates and credit availability.

>> ^mgittle:

If the bank in your latest example can't satisfy withdrawal demands, it probably borrows money from a commercial bank, which can request money from the Fed to cover the difference.

Change the word "request" to the word "borrow" and that's correct.

>> ^mgittle:
So, yes, the bank is not literally creating the money on its own, but it seems to me that banks granting loans for more money than they possess at any given time is the most significant reason for the Fed to have the ability to increase the money supply.

Again, banks aren't granting loans for more money than they posses. In the example above, they have $1,000, they can loan out $900, because they're legally required to hold 10% reserves.

Now, their balance sheet shows the following:

+$100 cash on hand as reserves
-$1000 owed to depositor
+$900 in debt owed to them by borrower
+$X in interest on debt owed to them by borrower

Which nets out to +$X interest in net worth.

There are two big risks with this arrangement:

#1: The depositor wants to close his account before the loan matures. The bank doesn't have the money to cover the withdrawl, and will need to borrow funds from another bank. If the borrowing costs are higher than the expected return from its loan, the bank is insolvent, and is gonna die. On conventional banks, the government will step in and cover the depositor's accounts up to some arbitrary dollar amount (I think it's still $250k), but the bank owners will be fired, and they'll seek out someone else to buy the bank and take over future operations.

#2: The borrower defaults on his loan. Since we're talking about only 1 depositor and 1 borrower, this single failure is the equivalent of 100% of the bank's borrowers defaulting at once. This too will result in the government stepping in, covering depositor's accounts, and restructuring the bank and selling them off.

What happened with the US financial crash was that a big, non-insured bank (Lehman Brothers) got hit by scenario #2, and since it was not a traditional, FDIC-insured bank, they just let it go bankrupt, and let the investor accounts get wiped out.

That started a panic, and led to lots of people pulling money out of other similar banks, leading to widespread cases of #1 happening, which had the effect of making banks default on loans they'd taken out with other banks, starting a new wave of #2...

That's why this system is fragile, and none of this has anything to do with monetary policy yet. This is all fiscal and regulatory policy.

What happened was that even after TARP stopped that domino effect of #2 leading to #1 leading to #2 again, banks were worried that all debt was much risker than they'd formerly believed, and so they raised the costs of borrowing (the interest rate) to sky-high levels, which severely curtailed the amount of people borrowing money to invest in real-world business activity.

That drop in investment led to a drop in production, which led to a drop in employment, which led to a drop in consumer demand, which led to a drop in production...

So now, the Fed is stepping in with monetary policy, and trying every trick in the book to stuff the banks with reserves, so they'll lower interest rates. They've had some success, but it isn't really doing the whole job, because unemployment is already so high, and consumer spending is so low, nobody wants to invest in expanding their business, no matter how cheap borrowing costs are...

That's what monetary policy is really about, stabilizing the interest rates and the overall flow of goods and services in the economy. When the economy slows, the Fed pumps money into the economy to try to make it go again. When it starts overheating (and leading to inflation), it siphons money out of the system to slow it down a bit.

Fiat currency doesn't really depend on growth -- if anything, growth depends on fiat currency, and the application of good monetary policy.

>> ^NetRunner:
Well, prices are set by market forces. You know, supply and demand. It's not necessarily the case that the Fed expanding the monetary base will lead to inflation.

Again, look at the last few years. Bernanke expanded the monetary base radically, but inflation has stayed low, and is on a declining trend.

And price changes from an increased "supply" of currency is called inflation.

Bernanke expanded the monetary base of the US dollar (ie world reserve currency) and people all over the world are in the streets rioting over the increased cost of living. PPI in the US has gone up 7.2% the last 12 months. And if you're referring to QE, most of that money is either parked at a bank or was used to buy toxic debt (to counter deflation). But when those TRILLIONS do reach the marketplace, inflation will be realized. That's why precious metal prices have blown up. The US dollar has lost 98% of it's purchasing power against gold the last 40 years.
>> ^NetRunner:
Oy. Okay, so here's how a bank works. People like you and me have some money. The bank offers to "hold" that money for us in an account, and at least used to pay us some small amount of interest on that money as incentive for us to keep our money with them.

But the bank doesn't just take our money and stick it in some vault for safekeeping, they lend that money out to other people, at a higher rate of interest than they offered us.

Problem is, we're allowed to withdraw our money from the bank whenever we want, so the bank has to keep some cash on hand (aka in reserve). However it will only keep a fraction of the total deposits in reserve, because otherwise it wouldn't be able to loan out money. That's what fractional reserve banking means.

That's what one would presume fractional reserve banking means, but it's not.




>> ^NetRunner:
I agree. Provided by "our system" you mean laissez-faire capitalism.

The banks take our savings and gamble them on risky, potentially profitable investments. That's sorta key to the functioning of capitalism though. Without that, the whole system crashes almost instantly.
LOL. The state stepping in to reward and cover up fraud is not laissez-faire capitalism. I don't get it. You defend the system, then you try to shift blame on free market capitalism?

>> ^NetRunner:
Artificially. You keep using that word. I don't think it means what you think it means.

Prices are set by market forces, and according to free market advocates this is perfect/moral/only way they can or could ever be set, or else we'll go to hell be socialists.

There are plenty of unnatural "market forces" in our current system. Even inflation itself. Hence, prices are artificially set.


>> ^NetRunner:
Different economic models hypothesize different answers. I tend to think the Keynesian story is right -- it's aggregate supply and aggregate demand. When you have a shift in either one that would lead to a higher equilibrium price, then you see "aggregate price" (aka the CPI) rise.
Which is to say, you can get both inflation and deflation without the Fed doing anything. To stabilize inflation, you actually need the Fed constantly adjusting the monetary base so neither inflation or deflation get out of kilter. Look at pre-1913 interest rates if you don't believe me.

John Maynard Keynes on inflation: "By this means government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft."

What you're talking about makes no sense. Prices in a market with sound money still go up and down. That's the way a market works. Calling it inflation and deflation doesn't make it so.

>> ^NetRunner:
I agree, if by "the ones that...extract value from that actually worked and earned their wealth" you mean any and all business owners, investors, and so on who have done nothing but collect interest on wealth they already own.

Maybe before you start going after people who are collecting interest on the wealth they presumably earned honestly, you will stop defending those who collect interest on money they created from nothing. Deal?

>> ^marbles:

>> ^NetRunner:
Why doesn't inflation cause wages to go up? Why do corporations get to raise prices, but labor never gets to raise the price of their labor? Is it because labor is in a weaker bargaining position?

Mostly because wages, like all other prices, are artificially set.
Artificially. You keep using that word. I don't think it means what you think it means.

Prices are set by market forces, and according to free market advocates this is perfect/moral/only way they can or could ever be set, or else we'll go to hell be socialists.

If the cost of a corporation's inputs goes up, then they raise the price of their goods. If a laborer's costs go up, why can't he raise the price of his services?

No matter what your answer to that might be, it's obviously not "because the Federal Reserve won't let employers pay their employees more."

>> ^marbles:
Better question: Why does inflation occur to begin with?

Different economic models hypothesize different answers. I tend to think the Keynesian story is right -- it's aggregate supply and aggregate demand. When you have a shift in either one that would lead to a higher equilibrium price, then you see "aggregate price" (aka the CPI) rise.

Which is to say, you can get both inflation and deflation without the Fed doing anything. To stabilize inflation, you actually need the Fed constantly adjusting the monetary base so neither inflation or deflation get out of kilter. Look at pre-1913 interest rates if you don't believe me.

>> ^marbles:
You're sorta ignoring the fact that inflation numbers are intentionally manipulated (like excluding food and energy costs) to keep cost-of-living numbers low.

Well, then don't take the government's word for it. Take the market's.

>> ^marbles:
>> ^NetRunner:
Now let's get real about cui bono from inflation.
That's kinda obvious isn't it? The ones that can create money from nothing and then extract that monetary value from those that actually worked and earned their wealth.


Now you're just repeating assertions without responding to what I'd had to say.

But I'll just echo my closing line from the last comment. I agree, if by "the ones that...extract value from that actually worked and earned their wealth" you mean any and all business owners, investors, and so on who have done nothing but collect interest on wealth they already own.

To give a response to the video at large, I think it's intentionally trying to get people to misplace blame.

Why doesn't inflation cause wages to go up? Why do corporations get to raise prices, but labor never gets to raise the price of their labor? Is it because labor is in a weaker bargaining position?

Why is that? Could it have anything with decreased union membership?

Also, it sorta ignores the fact that the worst decade for the middle class in our lifetimes was 2000-2010, which also was a period of the lowest average inflation we've had since WWII.

Now let's get real about cui bono from inflation. If the bulk of your wealth is in assets like houses, stocks, commodities, etc, inflation doesn't hurt the real value of your holdings. Hell, in straight dollar terms, it makes your bottom line go up.

But what if you're an investment bank, and most of your wealth is comprised of debt owed to you? In this case, inflation is bad, very bad. Debts are issued in fixed dollar amounts for a fixed interest rate. Inflation means the dollars coming back into you are worth less than the dollars you doled out at the start of the loan. If inflation exceeds the interest rate you issued, you might actually lose money on the loan!

So it turns out that the bankers very seriously want hard money. If they could get away with it, they'd prefer to see deflation all the time, because that means the money coming into them is worth more than the dollars they paid out!

The only logical reason to think fiat currency might be helping redistribute wealth upwards is if you believe capitalism is a rigged game from the get go. But the answer to that isn't to get people mad at the government, it's to get people mad at the founding building block of capitalism -- banks.

This is BS. Utter BS. Underlying social contract? - I think the government broke that contract a long damn time ago!!!
I hire workers that paid way to damn much for their college education.
I, and their parents, paid taxes for them to get a crappy public education before that.
I ship product on poorly maintained roads, where the person standing with the stop/go sign gets more per hour than my warehouse workers.
My employees pay taxes on the money I pay them, which I have paid taxes as well.
I pay taxes on every cent I earn and my employer pays taxes on every product we sell.
I pay for every damn thing I use and pay taxes on every damn thing I buy.
If I should happen to work my a$$ off and get rich, guess what I did it by my own damn self DESPITE the government - not because of. And it's not luck - it's hard damn work. You make your own luck.
As far as incentive's for investing by giving a lower tax rate - yep that's what we do and there is nothing wrong with that. I make money and pay taxes on it. I buy something and I pay taxes on it. I save money and I pay taxes on the interest. I put some of what I have left in the Stock market - I TAKE RISKS on investing in companies which promotes their growth and the strengthening of our economy and IF I should happen to make money off of it then that is the reward for taking the risk. I shouldn't have to pay the same tax rate as if I had gotten it from my employer. My job doesn't incur risk, investing does. If you don't give an incentive to someone for taking risk, then you have no investment. I'd just buy government bonds at some crappy interest rate- just not in California or Illinois.
Yet we all focus on the part where she mentions capital gains tax and not the other part where she mentions Medicare, Medicaid, and 2 wars? How about we focus on changing those first couple of things and get our government to run EFFICIENTLY and then come back asking for more money.

There are times when your parabolic orbit around reality comes dangerously close before you swing wide again. You are SOOO CLOSE to getting it, here. There is no free market. Not in our lifetime. Not in any lifetime. Like all utopic visions, it's a fantasy; a fantasy used to manipulate people like you into subservience. Liberty for the rich. Tyranny for rest.

When free market principles are put into place (like lowering taxes for the rich, privatization and deregulation) they yield no positive results. If you haven't been manipulated, then how do you explain your support for policies that fail time and time again? It's not a belief system, it's religion.

In the name of the Market, Ron Paul and the Invisible Hand, amen.

>> ^blankfist:

>> ^dystopianfuturetoday:
The free market crowd said that lowering taxes, privatization and deregulation would create jobs and grow the economy. We've done all that and we are now suffering massive income inequality, massive unemployment and recession. How many times do we have to bang our head against the wall before we figure out that free market politics don't work, never have and never will?

What free market is that exactly? I can't see a nurse for my medical needs without paying a doctor. I can't buy the drugs I need without a prescription. I can't cut people's hair without getting a license. I can't shoot a film without the cops shutting me down unless I have the tens of thousands the studios pay for permits. And on and on and on.
And don't blame a free market you and I've never seen in our lifetimes for the ills of the economy. The manipulation of interest rates, wall street bailouts and the housing bubble got us here to begin with, and that was 100% socially engineered. Time to renew your platitudes.

>> ^dystopianfuturetoday:

The free market crowd said that lowering taxes, privatization and deregulation would create jobs and grow the economy. We've done all that and we are now suffering massive income inequality, massive unemployment and recession. How many times do we have to bang our head against the wall before we figure out that free market politics don't work, never have and never will?


What free market is that exactly? I can't see a nurse for my medical needs without paying a doctor. I can't buy the drugs I need without a prescription. I can't cut people's hair without getting a license. I can't shoot a film without the cops shutting me down unless I have the tens of thousands the studios pay for permits. And on and on and on.

And don't blame a free market you and I've never seen in our lifetimes for the ills of the economy. The manipulation of interest rates, wall street bailouts and the housing bubble got us here to begin with, and that was 100% socially engineered. Time to renew your platitudes.

Drachen, it sounds like your beef with the rich is that they "hoard" money rather than pump it back into the economy. Your solution, then, it to increase the capital gains tax rate (what Obama is promoting in this video)? As a hypothetical rich person, I have two options as far as what to do with my money. I can put it into a safe but low-interest bank account or I can invest in capital (stock market, real estate, etc), where on average I stand to earn a greater interest rate but where I also put my money at much greater risk. If you disincentivize the latter with an increased capital gains tax rate, you are going to divert funds from being invested into the economy toward Scrooge McDuck's swimming pool.

And in case there is any confusion, rich people are not taxed at a lower net rate than poor people on INCOME. Rich people in the U.S. pay 39.6 cents on every dollar they make in income over $250,000 after deductions, while those who make less $39,600 after deductions are taxed at 15 cents to the dollar. However, traditionally, capital gains (as opposed to income) have been taxed at 15% flat. Why should capital gains be taxed at a lower rate than income? Arguments include:

1. Investment in capital is an investment in the economy. It is encouraged with a lower capital gains tax rate.
2. Money must first be earned as income before it can be invested. Therefore it has already been taxed. Capital gains tax in essence is a taxation on already taxed money.
3. Investment is risky, bringing in a salary is not. Risk averse spenders will not take risks unless they are incentivized to do so. But it is essential to the growth of our economy that this risk be taken. Refer to point 1.

>> ^pyloricvalve:

Thanks for the reply. There were things I really didn't understand about Krugman's Hangover Theory article, especially that very point that you quote. In fact I tried to ask in a post above about this but maybe you missed it. To me it seems only natural that there is no unemployment in the boom and there is some in the bust. Both are big reorganisations of labour, it is true. However, to start with the boom is much slower and longer so adaptation is easier. Also the booming industry can afford to pay slightly above average wages so will easily attract unemployed or 'loose' labour. As it is paying above average, there will be little resistance to people changing work to it. The boom is persistent enough that people will train and invest to enter the work created by it. The information for entering the boom industry is clear and the pay rise makes the work change smooth. I see no reason for unemployment.
The bust however is short and sudden. There is no other obvious work to return to. That information of what the worker should do is much less clear. The answer may involve taking a small pay cut or on giving up things in which people have invested time and money. Many people wait and resist doing this. They may well not know what to do or try to wait for opportunities to return. Thus there is plenty of reason for unemployment to be generated by the bust.
If I hire 100 people it can probably be done in a month or two. If I fire 100 people it may be a long time before they are all employed again. For me this difference seems so obvious I have a real trouble to understand Krugman's point. I know he's a very smart guy but I can't make head nor tail of his argument here. Can you explain it to me?


I'm trying to think how to connect what you're saying to the point Krugman's making (at least as I understand it).

At a minimum, he're Caplan making the same point in less space:

The Austrian theory also suffers from serious internal inconsistencies. If, as in the Austrian theory, initial consumption/investment preferences "re-assert themselves," why don't the consumption goods industries enjoy a huge boom during depressions? After all, if the prices of the capital goods factors are too high, are not the prices of the consumption goods factors too low? Wage workers in capital goods industries are unhappy when old time preferences re-assert themselves. But wage workers in consumer goods industries should be overjoyed. The Austrian theory predicts a decline in employment in some sectors, but an increase in others; thus, it does nothing to explain why unemployment is high during the "bust" and low during the "boom."

Krugman saying the same thing in more accessible language:

Here's the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?

And as a bonus, here's Brad DeLong making a similar case.

My real handicap here is that I'm not familiar enough with the fine details of the Austrian theory to say with authority what they believe. So if I misrepresent their position, it's out of ignorance.

What I gather is that ultimately the Austrian theory of boom and bust is that central banks are messing with the "natural" balance of investment and consumption goods, with a boom happening when investment is being artificially stimulated (by low interest rates), and a bust happens when interest rates eventually go back up (due to inflation, or expectations thereof).

The response from people like Caplan and Krugman is to point out that since aggregate income has to equal aggregate expenditure (because everyone's income is someone else's expenditure, and vice versa), a fall in investment should mean a rise in consumption, and a rise in investment should mean a fall in consumption. Which means we should never see an overall boom or an overall bust, just periods of transition from a rise in consumer goods and a fall in investment, to a fall in consumer goods and a rise in investment. We should never see a situation where they both fall at the same time.

But we do see a fall in both during the bust. Why?

Keynes's answer was that it happens because people are hoarding cash. Either people are themselves stuffing mattresses with it, or more likely, banks start sitting on reserves and refusing to lend out, either out of a fear of their own solvency (Great Depression), or because a deflationary cycle with high unemployment makes sitting on cash look like a good, safe investment for them (Great Depression, and now). Put simply, depressions are the result of an excess demand for money. And since money is an arbitrary thing, it doesn't have to be a scarce resource, we can always just make more...

>> ^NetRunner:
Exports alone don't account for the rise in prosperity post-WWII. A lot of it was that we'd build up a huge industrial infrastructure that pivoted from making bombers and tanks to making refrigerators and cars.


so you're saying the postwar boom was not because Americans were making money on exports, but because factory production was so profitable. If you think 18% of world exports wasn't the reason for the boom, then I have nothing
http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/shareworldexports.html

>> ^NetRunner:

I think you're assuming all debt leads to inflation. Have you looked at the stats on debt and inflation recently? Debt's going up fast, but inflation has stayed flat and long-term bond interest rates have fallen,
The debt can't go up forever, period. I agree w/ you on this: you can grow your way out of a huge debt. What reason do you have to think that we're going to go back to huge GDP growth here in the USA? I'm saying, either we need to grow, or control the debt. Don't you agree? also... http://money.cnn.com/2011/02/02/news/economy/interest_national_debt/index.htm

I can't find any evidence that the recovery in iceland was "Keynesian "

You're saying we need deficit spending to grow. We've had lots of deficit spending, and where is the growth? I'm talking over the last decade. I don't disagree that extra spending will help. I do assert that interest rates change, that you can't just spend X and get outcome Y. Rather, we have to fix what's wrong before we can recover.

We may be getting distracted by the name Austrian which may mean different things to different people. I think there are views skeptical of stimulus held by respectable economists. I put forward Russ Roberts as one example. You seemed to say earlier that these kind of views don't constitute a continuing argument against stimulus-type policy. If that's right, could you explain why? They seem very reasonable to me.

I would also be curious if you have a criticism of the Hangover theory of this recession (that it was caused by malinvestment due to artificially low interest rates.) Krugman criticised it by saying that if unemployment results from frictional problems reallocating workers to new industries, "why doesn't the investment boom—which presumably requires a transfer of workers in the opposite direction—also generate mass unemployment?"

Krugman seems to think that's a slam-dunk against the theory but surely there are simple explanations for why friction could happen one way and not the other. When an industry booms it takes place over a long period and is a beacon attracting loose labour to it. When the collapse comes it is much faster than the boom and there are no obvious beacons for where the misplaced labour is to go. It seems normal to me that the reverse process is more difficult and leads to more unemployment. If you've an answer to that I'd be interested to hear it.>> ^NetRunner: Honestly, I'm happy to litigate out the actual reasons why I think Austrian economics is wrong, but I don't really care to get into a contest of who's got the bigger expert parroting their pet theory.

>> ^marinara:

1. WWII is a bad example b/c USA had no economic competition after WWII.

Nations aren't businesses. Most of what's produced in the US is sold in the US, always has been, and likely always will be. Exports alone don't account for the rise in prosperity post-WWII. A lot of it was that we'd build up a huge industrial infrastructure that pivoted from making bombers and tanks to making refrigerators and cars.

>> ^marinara:
2. Are you assuming some level of debt after the 'space alien boost'?
I think you are. Or maybe you assume inflation doesn't hurt or something.

I think you're assuming all debt leads to inflation. Have you looked at the stats on debt and inflation recently? Debt's going up fast, but inflation has stayed flat and long-term bond interest rates have fallen, even after S&P tried their best to make them spike by downgrading our credit rating.

>> ^marinara:
Iceland politicians took on their banks, we didn't and now they're recovering while we aren't.


Incidentally, Iceland followed textbook Keynesian macroeconomic policy. Now they're better off than the countries who just tried to stick to austerity and tight money (the former by choice, the latter not).

>> ^marinara:

I doubt that any amount of spending could 'fix' the economy. Instead, you'd have to borrow-spend continuously, like pumping air into a burst balloon.


I think first you have to commit to a theory about what's wrong with the economy now -- not symptoms, like unemployment is high, but what the underlying root cause is.

There are a lot of things it's not being caused by. It's not been caused by any physical damage to our country's industry or infrastructure. It's not been caused by people suddenly waking up one morning having forgotten how to make things. We didn't suddenly lose all our natural resources. What, in terms of real economic capacity did we lose? Anything? Anything at all?

The other half of the "fake alien invasion" thing is that it tends to focus our minds on what's real (factories, workers, materials), and what's not (debt, money, inflation), and helps us realize how ridiculous it is that we would let concern about debt or inflation stand in the way of us putting our resources to work to save ourselves from being turned into some alien race's dinner.

Once you realize that, all you need to do to get the rest of the way is to realize that the best way to save yourself from problems with debt and inflation is to put your resources to work making as much stuff as possible, you start to see why Keynesians are annoyed that they might need to fake an alien invasion to get people to do the sensible thing...