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First off, I come from a very specific thought of economics called austrian economics. If you don't consider this a viable method of economics, then please stop reading and go enjoy your Keynesianism off in a corner.
There are only 2 things I care about when it comes to the economy. 1. underemployment 2. Prices. With low underemployment and low prices you can see that a country is growing and becoming wealthier.
So, it's 2010, economic "experts" everywhere predicted that we would be contuing our growth and that housing profits would slow but still be a very profitable venture. We also expected the federal reserve to be super advanced and use computer simulations to determine the optimal interest rate, etc, but now here we are, arguably worse off than when Obama took office. Is it Obama's fault? nope. Is it Bush's fault? Maybe a little, but mostly no.
So to determine who's fault it is let's analyze what happened. 1. subprime mortages (buying a home for personal use) tanked, and the banks which invested in each other started failing. This triggered a huge decrease in investments and the stocks decreased (since investing in a financial company was not worth it). A lot of people saw the housing prices and knew they were unsutainable. How did this happen?
This was caused by 15 years of bad economic policy.
1. Minority subsidation housing program at the federal level. The government cited that minorities did not own their own home nearly as much as whites, so they proceeded to pay for part of the cost of the home. This increased demand and also increased prices (and supply to fill the increased demand)
2. impossible interest rates. For a long time interest rates for homes was crazy. 0% to borrow directly from the feds meant people getting loans for like 5%. This also increased demand (etc).
3. Lack of other investments. With the tech bubble crash in 2000 (right before bush took office which people seem to forget), investing in tech did not seem wise, so people started investing in other stuff. With the increased demand and profits in housing, this also increased investing
4. Horrible local laws. I grew up in the central valley, at the heart of the sub prime mortgage problem. Almost every city also had a subsidy program, but worse than that they put a very low cap on the # of houses that could be made. With a ton of people out of jobs moving from the bay area to the valley (since houses are like 1/2 the price), with the lack of houses to meet the demand and all of the laws preventing an increase in supply houses in my hometown tripled in less than 3 years. (we bought a house for $200,000 that was worth $600,000 during the peak of the bubble). For many people, including my parents, this was an opportunity to take out a loan on their house to buy a car (a lot of people did the same thing), however, when reality kicked in and the prices were discovered to be unsustainable, the prices dropped back down to what they were. Mal investments always cause underemployment since the money that would have gone to sustainable jobs was waisted and now there is a waiting period before companies can find something to invest in.
Normally bubbles are not a problem. In fact, they happened all the time, the difference was that prices and wages would drop to the point where underemployment would reach near 0 levels once again. However, this natural way of balancing is *impossible* with current law. Now let me introduce you to the #1 reason for recessions: minimum wage. Now like many people, i think minimum wage is too low (i worked at minimum wage for a while), however i was always appreciative that i had a job while some of my friends did not. Normally price control controls the maximum you can sell a good or service for (which we know causes problems...just read about rent control), however minimum wage is worse. It is the minimum price you can sell your services for. Even if you were willing to work for less than minimum wage, you are not allowed to by law.
Now minimum wage is actually not usually a problem since it only cuts off the lowest of wage earners (which sadly happens to be mostly young minorities hence big crime), but the problem is when there is a major shift backwards in wages, this can start to cutoff people in a shifting rate. [http://en.wikipedia.org/wiki/Minimum_wage#Economics_of_the_minimum_wage]
So now we are stuck. Banks have money to loan, but companies can't borrow since labor costs are too high, so there is a lot of money sitting around. When money sits, prices drop even more causing a spiral of death.
There are a few ways governments can solve this problem(without lowering minimum wage).
1. Spend a TON of money. By spending money, they can effectively "kick start" the economy by increasing demand for some products or goods. Normally the only thing government can spend a lot of money on is war (which is why we didn't end up in a recession in 2002). Now, although this might seem like a viable way, realize that it is a partial solution to the problem, but that almost everything that the government buys will be consumed and not used as capitol (equipment or wealth to increase production). This is usually followed by a long time of very slow growth as debts are repaid and government has less money to spend on social programs.
2. Print a TON of money. That's right. The good ole money machine. By printing money and cancelling debt they effectively increase the base amount of total money in the system and cause prices to increase. You will know this is happening if the value of the dollar drops while rare commodities increase (like gold, silver, and partially oil). How does this work? When the government prints money, they can lower the cost of the debt they owe and by increasing prices they can reverse the effect of minimum wage. When prices increase, natural labor costs generally also increase. This will cause a shift in demand and unemployment will drop. This is even more dangerous than the first solution. This solution destroy's investments and confidence. In a normal country, this would destroy it, but the United States has the fortunate advantage of being the world's major currency in a world where there is no viable alternative (all major currencies are fiat currencies). The only way investors can hedge against inflation to protect their wealth is by investing in commodities (gold, silver, oil, Art, property). There is not enough of these commodities in the system to protect everyone, so these commodities will bubble a little, but the net value is that if you correctly hedge against inflation, you end up better than if you did not. Only the United States and maybe china or EU can get away with this policy, and EU has a harder time due to the conflicting governments. The biggest thing is that inflation ruins years of hard work. People who have been saving up for their retirement will suddenly find that prices have doubled, but their investments haven't.
Who wins? Someone always wins when the economy shifts. The one's who win are always those who happen to have the money right now and can spend it on something. If the federal reserve cancels like 25% of the debt (which i can see happening in like 4-5 years), then property prices will double again. Banks will slowly reinvest in property waiting/hoping for this to happen as a wedge against inflation from their long term loans. (inflation also makes lending unprofitable).
So what is the permanent solution to prevent this?
1. Don't support subsidies. Subsidies are the worst way to distort the market. You won't see this reflected in your receipts at the grocery store, but you will see if reflected in your tax statement at the end of the year.
2. Don't support a FEDERAL minimum wage. States each have their own levels that fit well with their citizens. If a state's minimum wage is too high, then the companies can simply move to another state with more lenient wages, but with a federal minimum wage, companies have to move oversea in order to be competitive.
3. Don't support bailouts, or government debt or anything that causes the government to borrow or print money. Debt is the fastest way to ensure inflation. Right now gold is so expensive, not because of it's actual worth as a metal, but because investors don't think it's possible for the US government to pay back it's debt and believes that the feds will eventually cancel some of that debt.
There are a lot of little things that could have prevented this recession (cities having more lenient quotas for building houses, etc), but the gist of the problem lies with the federal reserve and the legislative branches borrow and spend policy. Bush spent too much money on war and tax cuts(when the government had no money), and obama is about to subsidize like 10-20% of the economy with the health care bill.
 
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On November 15 2010 16:57 darmousseh wrote:
1. Don't support subsidies. Subsidies are the worst way to distort the market. You won't see this reflected in your receipts at the grocery store, but you will see if reflected in your tax statement at the end of the year.
But subsidies are needed to cover the positive externalities of various goods and services such as immunizations.
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I think OP intended it to be talking about farm subsidies and such, not "public good" subsidy such as immunizations and public science. Correct me if I am wrong.
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Nah I took that as referencing goods subsidised to keep employment up as well. (or to keep basic food costs down as well, but that's another argument)
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I'm not talking about subsidies for goods that the industry can't provide (roads, etc) i'm talking about stuff the market already creates (food, cars, labor, etc). Basic food prices would actually be about the same, but because of subsidies foreign markets cannot export to the united states. Providing money for general services are usually called social programs.
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On November 15 2010 16:57 darmousseh wrote:
please stop reading and go enjoy your Keynesianism off in a corner.
Okay. Me and the rest of the world will go smoke a bowl and stimulate some bitches.
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5003 Posts
First off, I come from a very specific thought of economics called austrian economics. If you don't consider this a viable method of economics, then please stop reading and go enjoy your Keynesianism off in a corner.
Yup cause all non-Keynesians are Austrians?
your entire analysis is wrong btw, the Austrian approach seems to be
- Bad shit happened. "Just like Austrians Predicted", because Austrians predict shit will go wrong everytime something happens. "OH NO GOVERNMENT IS DOING SOMETHING! ITS GONNA CAUSE A DEPRESSION"
- Bring in Austrian "fundamentals" which are really dogmatic principles that cannot be questioned no matter what, even though it completely and utterly ignores human nature (makes the title of Mises' book kinda ironic). Pretend that, not sticking to these principles has caused the recessions somehow, and nothing that sticks to these principles are "unsustainable"
Can you actually prove to me that your solutions are actually solutions other than reverting the austrian dogmatic principles? do you have EVIDENCE to base your principles upon other than what sounds nice and this irrational faith in the results of mathematical results that came from classical economists (despite you guys trashing them later LOL)
Either way I'm not surprised at ALL you're austrian considering how you come off in other threads I've seen you post in lol
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5003 Posts
Also the most amusing part is you say "go enjoy your Keynesianism in the Corner" when it is the Austrians who are in the corner in actual economics, lol. The correct phrase should be "please leave us Austrians alone to rot by ourselves in our little corner ;_;" rather than claiming Keynesian view isn't the most mainstream view nowadays (for a pretty good reason)
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9070 Posts
What do you know about the Austrians, Milkis ? I'm asking in my qualities of econ student at the Freiburg University, the place where Hayek himself was a Professor for long years, the place considered the mecca of the Austrian school.
Its useless to throw shit at the Austrians since the theories are so brutally ignored, not only not studied - ignored, in the states or even in the UK. I hate having the discussions in such a tone, cause it always gets like Borat and his gipsy theories.
Edit: The keynesian fanboys will always be like "lol if you are clever Austrians, why we rule world, noob? sup rofl gtfo"
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On November 16 2010 05:48 Milkis wrote:Show nested quote +First off, I come from a very specific thought of economics called austrian economics. If you don't consider this a viable method of economics, then please stop reading and go enjoy your Keynesianism off in a corner.
Yup cause all non-Keynesians are Austrians? your entire analysis is wrong btw, the Austrian approach seems to be - Bad shit happened. "Just like Austrians Predicted", because Austrians predict shit will go wrong everytime something happens. "OH NO GOVERNMENT IS DOING SOMETHING! ITS GONNA CAUSE A DEPRESSION" - Bring in Austrian "fundamentals" which are really dogmatic principles that cannot be questioned no matter what, even though it completely and utterly ignores human nature (makes the title of Mises' book kinda ironic). Pretend that, not sticking to these principles has caused the recessions somehow, and nothing that sticks to these principles are "unsustainable" Can you actually prove to me that your solutions are actually solutions other than reverting the austrian dogmatic principles? do you have EVIDENCE to base your principles upon other than what sounds nice and this irrational faith in the results of mathematical results that came from classical economists (despite you guys trashing them later LOL) Either way I'm not surprised at ALL you're austrian considering how you come off in other threads I've seen you post in lol
The funny thing is, Milkis (iirc) is from the University of Chicago (chicago school of economics), which is one of the more free-market approach school of economics, and he still radically (or at least appears to) disagrees with you.
I disgaree with 1 (I would argue that the stimulus packages leads closer to zero-sum-gains rather than tremendous assaults to the economy), 2 (from an equity point of view, though I can see the argument that the minimum wage is too high), and disagree heavily with 3 (even many free market economists believe that the bailout was a necessary evil. I've come across several sources and professors who believe that if the bailout didn't occur, the recession would be to the level, if not worse, than the Great Depression).
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5003 Posts
On November 16 2010 06:02 disciple wrote:
What do you know about the Austrians, Milkis ? I'm asking in my qualities of econ student at the Freiburg University, the place where Hayek himself was a Professor for long years, the place considered the mecca of the Austrian school.
Its useless to throw shit at the Austrians since the theories are so brutally ignored, not only not studied - ignored, in the states or even in the UK. I hate having the discussions in such a tone, cause it always gets like Borat and his gipsy theories
To be fair, it's quite likely you guys don't get a fair representation due to the internet bred varieties around. The biggest reason why Austrians are "ignored"/disregarded is because of people who make posts like darmousseh or Yurebis.
I'm under the impression that the sole basis of Austrian Economics is dogmatic -- because of the fundamentals you stick with, there hasn't been a single useful contribution to the academic economics world in years. Meanwhile, All I see are constant posts by Austrians saying "told you so" every crises like they matter -- while in the end, they don't offer any practical solutions, except sticking to ideals.
Secondly, I find the claims of every Austrian I have encountered on the internet extremely naive and extreme -- mostly because, they stick to what they call fundamentals and what I call dogmas. Most criticism of Austrians are "well you didn't stick to principles", which is utterly worthless when there is no empirical evidence that these principles work. Of course, you guys also don't believe in Empiricism or even using mathematical models -- for, what in my opinion "no good reason" -- the reasoning given by Austrians is literally "it's not perfect so you can't use it".
I have to run now so I'll just paraphrase -- given what I know about Austrian Economics, either from talking with people (mind you, many of these people were more intelligent than many of the "Austrians" i've seen post around the internet), or from reading -- I simply disagree that their principles are actually axiomatic and that many of their theories seem to go way too far trying so that they can still "believe" in the fundamentals. What makes it worse is that many of the austrian economists i have talked to seem to disagree on a lot of these fundamentals all together which makes me very uneasy about the entire disicipline.
If you want to talk about it more or willing to answer more questions from me regarding Austrians (since I'm always looking for educated Austrain Economists so I can throw them questions, since i haven't found many that actually agree with each other in many of these things), feel free.
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EPT
