Dr. Bill Conerly

Two Good Economics Books: Spin-Free Economics, Animal Spirits

This has been an exceptionally good discussion (aside from the algebra). Here are my thoughts on the Keynsian, Austrian, monetarist controversy.

Keynes's work led to a mechanistic, mathematical approach in the hands of Sir John Hicks and others, exemplified by the IS-LM model. Yet Keynes's actual words sound--Austrian! He writes at length about decision-making under uncertainty. That business executives making capital investment decisions don't know what the price of their output will be in the future, but they must make decisions now. He channels (without crediting him) Frank Knight's distinction between risk (a game where we know the relevant probabilities) and uncertainty (a game where we don't know the probabilities). Keynes writes about what people do when they don't know the probabilities, which sounds a lot like modern behavioral finance: people do what seemed to work in the past and what others are doing now. I have no doubt that we live in a world with this uncertainty, which sounds Austrian.

(In the 1968 Axel Leijonhufvud wrote an insightful book called On Keynesian Economics and the Economics of Keynes which highlights the differences between the mechanistic view and the "true" economics of Keynes.)

What does this non-mechanistic, uncertainty-filled view mean for the macroeconomy? The economy will not be perfectly, smoothly functioning, even in the absence of government policy mistakes. That sounds pretty Keynesian.

However, this conclusion says nothing about the magnitude of the market failures. Will they be little missteps of neglible consequence, or massive depressions? To answer that question I like Milton Friedman's Monetary History of the United States, 1867-1960. I'm convinced that the greatest macroeconomic problems have been the result of policy errors, although I'll concede that private sector errors in decision-making have contributed to instability.

Finally, pointing at least some of the blame at the private sector does not prove that the public sector can save us. In the real world we have a Federal Reserve chairman who is tremendously afraid that we'll enter a depression on his watch. (I suspect, without any evidence whatsoever, that his advice to someone else would have been different than what he actually did as chairman.) We have a Congress that is totally focused on their own political power and the next election. We have a President who is also focused on political power and the next election. (And I could have written that at about Mr. Bush as well as Mr. Obama.) Can this political decision-making process give us policy action of the right timing and magnitude to stabilize the economy? How about to simply do more good than harm? I am not at all convinced of that.

My interest is mostly in how business leaders should adjust their plans to account for changes in the economy. One theme I'm emphasizing is that companies should dial up their economic contingency planning, because we'll continue to a more cyclical economy in the coming years.

Economic Outlook: Savings Will Soon Drive Increased Spending

HardToLove,
My apologies; the chart's vertical axis should have been labeled "$ billion change, month to month." The definition of disposable income used is straight from BEA; subtracts from income taxes but not any spending at all; plenty of explanation at bea.gov. Also note that the data are at an annual rate. Quick calculation is that it comes out to an extra $128 per household per month.

You are right that this is not much, but the decline in consumer spending last fall was much smaller per household--but it had massive effects on the economy.

Don't Buy the Housing Headlines

Thanks for the comments, folks. Here are some reactions:

JoeDirect and smalltownbanker are both right: a few markets are hugely disastrous, and the recovery will not start there. It's actually good for the country as a whole for the housing oversupply to be highly concentrated in a few states. The excess supply in Florida does little to lower demand in, say, Maryland. Once the states that are not hugely overbuilt get a bit of growth, then contractors go back to work and sawmills reopen. We can get some strength in total economic activity even with some pockets of weakness.

Regarding the housing vacancies, Griz's comments point up the importance of looking at true supply, which is best measured in the Census Bureau's vacancy stats. The usual measures, based on homes listed for sale, can be very misleading.

Thanks for the comments, friends.

Consumers Shouldn't Be So Gloomy

Jplout: BLS publishes several alternative measures of unemployment, which might better reflect the underlying level. But they all show the same trend relative to past data.

iThinkBig: interesting decomposition into three camps. What's the data source for the split between megacorps and small business?

pepster: there's actually data on that from BLS Consumer Expenditure surveys. Spending on apparel is almost, but not quite, as large as spending on gasoline.