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ECON ARTICLESTable of Contents

More Dough for the Rich?

Is It All Relative? Maybe Oil Prices Aren’t So Bad After All 4/19

Is It All Relative? Maybe Oil Prices Aren’t So Bad After All 4/18

The Impact of Keynes & The General Theory

Recovery or Recession?

John Maynard Keynes

Why Economists Disagree

After Months Out of Work: "I Feel Betrayed"







(from US News & World Report, October 18, 2004, p. 63)

As he works the friendly crowds along his campaign trial, President Bush has come up with a novel argument in defense of his upward-tilted tax cuts.  It boils down to this:  No sense trying to raise taxes on the rich as my opponent wants.  The rich will just hire more “lawyers and accountants,” and you ordinary folks will end up paying the bill for them.  Or, as he put it in Lima, Ohio, “The rich dodge, and you get stuck with the bill.” 

Gee, how come then the unemployment lines aren’t clogged with tax lawyers and accountants?  After all, by the president’s logic, the rich don’t need so many of these functionaries now that his tax cuts have, as a recent Congressional Budget Office study shows, substantially reduced both their tax rates and their share of total federal taxes.  And, come to think of it, If it’s true that if you tax the rich more they end up paying less while the rest of us end up paying more, then way wouldn’t it also be true that if you tax the rich less, they end up paying more while the rest of us end up paying less?  And if that’s so, why not just stop taxing the rich entirely, and none of us will have to pay taxes.

Before you dismiss this reasoning as absurd, consider that the president may well be sincere in this belief.  After all, such a rationale is quiet consistent with the apparent thrust of his further tax-cutting plans, which, cumulatively, would ultimately exempt the very affluent from most, if not all, federal taxation.  Start with his goal of making the estate-tax repeal permanent.  The GOP-dubbed “death tax” is now scheduled to vanish-but only for the year 2010(book your exit flight now!).  Contrary to popular belief, the estate tax already hits only the top 2 percent of inheritances, so the benefits of total repeal would be extraordinarily concentrated.  Add to that the president’s plan to create new tax-advantaged savings accounts that, experts say, would ultimately shield most high-bracket investment income from taxes.  For while the president is fond of talking about America as an “ownership society,” the plain fact is that the vast bulk of taxable capital income dividends, gains, real-estate returns, and the like-nests at the tiptop of the income distribution.

Understandably, President Bush has shield away from a forthright call to except the investing classes from taxation.  True, even liberal politicians, as well as Americans generally, are loath to criticize policies that favor the wealthy, lest they be accused of the dreaded “politics of envy.”  Still, one doesn’t want to test the limits of public tolerance.  So instead, the president talks about “reforming,” and “simplifying,” the tax code.  And, indeed, there is much to recommend such an approach. All the current tax breaks for worthy purposes from educating kids to exporting tractors not only distort overall economic growth but encourage cheating. And when it comes to outright evasion, we’re not talking pretty change: Former Treasury Secretary Paul O’Neill puts the price tag on “owed but uncollected taxes” at a whopping $300 billion a year. Essentially, he says, this amounts to “government by deceit.”

Top heavy.

A case can also be made for jettisoning the corporate tax (which about a third of our biggest corporations often avoid entirely, a recent study finds). The likely replacement is a value-added (or national sales) tax, which is far easier to collect and can be levied on imports and rebated on experts under international trading rules. The problem is that these moves would make the U.S. income distribution even more top heavy. Never mind the politics of envy; even Federal Reserve Chairman Alan Greenspan- no wishy-washy liberal he-has taken note of the “increasing concentration of incomes in this country.” And, he told Congress in June, “for a democratic society, that is not a very desirable thing to allow to happen.”

It’s especially undesirable if the big losers are “hardworking people who play by the rules,” says Brandon Roberts, coauthor of a new study by the Working Poor Families Project. The study, funded by three foundations, details the plight of the more than 1 in 4 working families who, despite having on average more than one breadwinner in the labor force year-round, still can’t make ends meet. Adding to the problem of federal tax regressivity, these families now fork over an average 11.4 percent of their income just in state and local taxes, compared with only 5.2 percent for the top 1 percent of families in income.

So, if the president is serious about reform, and not just about exempting his friends from the reach of the Internal Revenue Service, and if a fair and healthy democracy is also a priority, he will have to be thoroughgoing. And that, O’Neill warns, requires moving beyond “the compartmentalized thinking that artificially separates questions like payroll taxes and healthcare financing.” You have to do it all together, which means taking on the hordes of lobbyists, financial interests, and, yes, do-gooders too, all of whom cherish the treasures buried in our labyrinthine tax code. Winning that fight calls for a firmness and consistency that could make conquering Iraq seem like a cakewalk.






(from The Christian Science Monitor, April 19, 2005)

We groan when our grandparents go on about Coca-Cola costing only a nickel in their day. How did things become so much more expensive, they always want to know? Here's the short answer: With inflation factored in, that same bottle of Coke during World War II would cost roughly what we pay for it today. Eggs, milk, and bread now cost less. But when the subject of gasoline comes up, we sound like our elders. How did it get to be so much?

The fact is, oil is still relatively inexpensive. By one measure tracked by Dow Jones, we are still far from matching an April 1980 spike in US oil prices. The $39.50 per barrel price that month exceeds $90 in today's dollars. We remain a long way from that, with oil easing below the $50 mark in trading Monday.

That's not to say that energy costs aren't hitting families and corporations in the pocketbook. Even as oil prices have softened in recent days, there's been new concern about energy dampening economic growth. But a broader view - looking at oil over a longer period and against other goods and services - puts the impact in a less dire perspective.

"Gas is actually cheap right now," says Timothy McMahon, editor of "Up until a year ago, oil was at a historic low, and they were giving this stuff away. And so to go from $20 a barrel to $50 a barrel looks like a big increase in a small period of time. But if it were spread out over those 25 years, nobody would say a thing."

Even with the rising costs, economists say, energy still makes up a small percentage of a family's budget, about 4 percent. That's half what it was in the early 1980s. In fact, lots of goods and services have gone down in price during that time, including clothes, electronics, and food. But don't dismiss your grandparents that quickly. Certain things like new cars, new homes, healthcare, and a college education are considerably more expensive today. AAA, the nation's largest organization for motorists, is quick to point out that most families try to stick to some kind of household budget and do feel the pinch when oil prices fluctuate.

"AAA's view for a long time has been that inflation-adjusted prices for energy are probably helpful to economists and policymakers, but not for the typical family that has to pay a gasoline credit-card statement every month," says Geoff Sundstrom of AAA. "The prices are paid with real dollars or current dollars."

Consumers seem to be taking the rapid rise in oil prices in stride. Many aren't cutting out that weekend movie to make up for the damage at the pump.

Jeff Stepanik, for instance, says gas prices over $2 a gallon have not had any impact on his family's budget (or lack thereof). He is still tinkering around with motorcycles and his wife is still happily hitting the mall. "We don't live any differently than we did before," says the Houston account manager. "It's not like we're going without a meal because of gas prices." But he is considering a life with routinely higher gas prices - as witnessed by his family's most recent purchase. Three weeks ago, Mr. Stepanik sold his wife's "gas-guzzling" Ford Expedition and bought a hybrid Nissan. "This vehicle made more financial sense, because we are not going to stop driving," he says.

He estimates that gas prices would have to exceed $10 a gallon before he considers changing his driving patterns. That's not an uncommon attitude in the United States. Even during the oil embargo of the 1970s, it took a while before consumers began buying smaller, more fuel-efficient cars or moving closer to where they worked.

"It's going to take a lot higher gas prices for people to consider using mass transit or carpooling again," says Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University in Dallas. "It is really difficult for Americans to give up the freedom they have with the automobile." He sees it happening perhaps first with the younger generation, who are more shocked by the rising prices because they have grown up with cheap gas. For instance, he knows a college student who took a lower-paying summer job because it was 20 miles closer to where he lived.

"They are doing the math," says Mr. Baxter.

But Michael Solomon, consumer behavior expert at Auburn University in Alabama, calls the frenzy over rising gas prices "a tempest in a teapot," considering the amount of money people spend on small indulgences. "The same people who are complaining about gas prices don't blink when they pay $3.50 for a latte," he says. "That's different somehow."

What's different is the changing perception of certain goods and services, he says. The necessities, such as food, clothing, and energy, are supposed to stay relatively constant, so that every year consumers are able to afford a little more of the "good stuff." "We learn that a loaf of bread is $2.29 and we base our expectations on that. The usual becomes the right," says Dr. Solomon. "But the 11th Commandment is not that bread shall be $2.29."






(from The Christian Science Monitor, April, 18, 2005)

Have American consumers finally emptied their purses? Economists have debated that question for a few years now, and for Paul Kasriel, the answer today is "maybe yes."

As evidence for this conclusion, Mr. Kasriel, director of economic research at the Northern Trust Co., a Chicago bank, looks no farther than Harley-Davidson Inc. Last week the fabled motorcycle manufacturer announced that it was cutting back shipments of its machines and its earnings forecast for this year. Apparently too many 2005 models are cluttering dealer floors. Kasriel wonders if aging baby boomers - big buyers of these powerful bikes - are closing their wallets. They may be investment bankers or lawyers during the week, but on weekends, they become Walter Mittys. Donning studded leather jackets and bandannas, they mount their macho bikes to roar down America's highways. But the drag in sales involves more than just motorcycles. Last Wednesday, the Commerce Department said retail sales in March rose a mere 0.3 percent to $339 billion, growth decidedly below the forecast of Wall Street economists.

So what is behind the apparent shift in spending? Economists point to five key factors:

  • The nation's net national savings rate has plunged to a record low of 1.5 percent of total gross domestic product, its output of goods and services, since early 2002. The federal government is running deep in the red. American businesses are doing better. But consumers are racking up bigger and bigger credit-card bills. As one result of the shortfall in domestic saving, the nation is running a record trade deficit and a current account deficit exceeding $600 billion. In essence, the nation is splurging. It's piling up debts abroad, buying more and more Japanese cars, Chinese toys, and clothes, etc.

  • Oil prices are about quadruple those of late 1998 - a drag on other consumer spending.

  • Job growth slowed in March. Only 110,000 payroll jobs were created, and the unemployment rate returned to 5.2 percent. Announced layoffs by companies through March are running 9.2 percent ahead of last year, notes Challenger, Gray & Christmas Inc., a Chicago outplacement firm. As might be expected, workers without jobs usually spend less.

  • Real wages are being compressed by the desire of businesses to cut costs and, to some degree, competition from low pay abroad as globalization grows. Wages also are lagging behind inflation. This is unusual in a period when productivity has been growing rapidly - a 4.1 percent annual rate since 2001. Nonetheless, real wages fell 0.5 percent last year, and in the first three months of this year, the annualized nominal rate of wage growth was only 2.3 percent, a bit below inflation. "People are spending everything they are earning, and then more," says Kasriel.

  • The Federal Reserve is pushing up interest rates in an attempt to avoid more inflation. That raises the cost of borrowed money and makes the purchase of a house more expensive.

Kasriel regards this latter factor as possibly the most threatening to the economy. Yet he still sees GDP growth running at a 3.25 percent annual rate for the rest of this year, somewhat below the consensus of 3.6 percent of some 50 economists surveyed monthly by Blue Chip Economic indicators. That's a slowdown, but not a recession. Most Wall Street economists don't like to make forecasts too far from the consensus. The consensus is usually a safe place to be. If an economist makes a prediction way out of line with the consensus and he proves to be wrong, his reputation will suffer. He might even be fired.

Kasriel is one of the minority of economists these days who gives some weight to the nation's money supply in making forecasts. A hike in interest rates usually slows the growth in money - the cash and credit that people use to buy things and services - after about three months. In turn, that retards economic activity after perhaps six months or so.

Since the first half of 2004, the growth rate in the money supply has fallen from as high as 9 percent to 3.6 percent in the last 13 weeks - not much more than inflation, he says. In addition, the leading indicators - statistics intended to point to the future path of the economy - are weak. Consumer confidence dipped in March, notes the Conference Board. The tax cut boost is past. That's the gloomy side of the economy. But maybe it's just a spring phenomenon.

David Malpass, chief economist of Bear, Stearn & Co., a New York investment firm, tosses out as many good numbers as Kasriel can bad numbers. Mr. Malpass notes that there was talk of a slowdown also in the springs of 2002, 2003, and 2004 - and now again this spring. "The economic environment is nearly as good as in the past three springs, and the GDP growth result will be similar - steadier and faster than historical norms," he predicts. That is, growth in GDP will run between 3.3 and 4.5 percent this year.






(from Econometrica, July 1946)

I have always considered it a priceless advantage to have been born as an economist prior to 1936 and to have received a thorough grounding in classical economics. It is quite impossible for modern students to realize the full effect of what has been advisably called the "Keynesian Revolution" upon those of us brought up in the orthodox tradition. What beginners today often regard as trite and obvious was to us puzzling, novel, and heretical.

To have been born as an economist before 1936 was a boon – yes. But not to have been born too long before! The General Theory, caught most economists under the age of 35 with the unexpected virulence of a disease first attacking and decimating an isolated tribe of south sea islanders. Economists beyond 50 turned out to be quite immune to the ailment. With time, most economists in-between began to run the fever, often without knowing or admitting their condition.

I must confess that my own first reaction to the General Theory was not at all like that of Keats on first looking into Chapman’s Homer. No silent watcher, I, upon a peak in Darien. My rebellion against its pretensions would have been complete, except for an uneasy realization that I did not at all understand what it was about. And I think I am giving away no secrets when I solemnly aver – upon the basis of vivid personal recollection – that no one else in Cambridge, Massachusetts, really knew what it was about for some twelve to eighteen months after its publication. Indeed, until the appearance of the mathematical models of Meade, Lange, Hicks, and Harrod, there is reason to believe that Keynes himself did not truly understand his own analysis.

Fashion always plays an important role in economic science: new concepts become the mode and then are passť. A cynic might even be tempted to speculate as to whether academic discussion is itself equilibrating; whether assertion, reply, and rejoinder do not represent an oscillating divergent series. In which – to quote Frank Knight’s characterization of sociology – "bad talk drives out good."

In this case, gradually and against heavy resistance, the realization grew that the new analysis of effective demand associated with the General Theory was not to prove such a passing fad, that here indeed was part of "the wave of the future." This impression was confirmed by the rapidity with which English economists other than those at Cambridge, took up the new Gospel, e.g., Harrod, Meade, and others at Oxford; and, still more surprisingly, the young blades at the London School, like Kaldor, Lerner, and Hicks, who threw off their Hayekian garments and joined in the swim.

In this country it was pretty much the same story. Obviously, exactly the same words cannot be used to describe the analysis of income determination of, say, Lange, Hart, Harris, Ellis, Hansen, Bissell, Haberler, Slichter, J. M. Clark, or myself. And yet the Keynesian taint is unmistakably there upon every one of us.

Instead of burning out like a fad … the General Theory is still gaining adherents and appears to be in business to stay. Many economists who are most vehement in criticism of the specific Keynesian policies – which must always be carefully distinguished from the scientific analysis associated with his name – will never again be the same after passing through his hands.

It has been wisely said that only in terms of a modern theory of effective demand can one understand and defend the so-called "classical" theory of unemployment. It is perhaps not without additional significance, in appraising the long-run prospects of the Keynesian theories, that no individual, having once embraced the modern analysis, has – as far as I am aware – later returned to the older theories. And In universities, where graduate students are exposed to the old and new income analyses, I am told that it is often only too clear which way the wind blows.

Finally, and perhaps most important from the long-run standpoint, the Keynesian analysis has begun to filter down into the elementary textbooks; and, as everybody knows, once an idea gets into these, however bad it may be, it becomes practically immortal.

Thus far, I have been discussing the new doctrines without regard to their content or merits, as if they were a religion and nothing else. True, we find a Gospel, a Scriptures a Prophet, Disciples, Apostles, Epigoni, and even a Duality; and if there is no Apostolic Succession, there is at least an Apostolic Benediction. But by now the joke has worn thin, and it is in any case irrelevant.

The modern saving-investment theory of income determination did not directly displace the old latent belief in Say’s Law of Markets (according to which only "frictions" could give rise to unemployment and over-production). Events of the years following 1929 destroyed the previous economic synthesis. The economists’ belief in the orthodox synthesis was not overthrown, but had simply atrophied: it was not as though one’s soul had faced a showdown as to the existence of the Deity and that faith was unthroned, or even that one had awakened in the morning to find that belief had flown away in the night; rather it was realized with a sense of belated recognition that one no longer had faith, that one had been living without faith for a long time, and that what, after all, was the difference?

The nature of the world did not suddenly change on a black October day in 1929 so that a new theory became mandatory. Even in their day, the older theories were incomplete and inadequate: in 1815, in 1844, in 1893, and 1920. I venture to believe that the eighteenth and nineteenth centuries take on a new aspect when looked back upon from the modern perspective, that a new dimension has been added to the rereading of the Mercantilists, Thornton, Malthus, Ricardo, Tooke, David Wells, Marshall, and Wicksell.

Of course, the great depression of the thirties was not the first to reveal the untenability of the classical synthesis. The classical philosophy always had its ups and downs along with the great swings of business activity. Each time it had come back. But now for the first time, it was confronted by a competing system – a well-reasoned body of thought containing among other things as many equations as unknowns. In short, like itself, a synthesis; and one which could swallow the classical system as a special case.

A new system, that is what requires emphasis. Classical economists could withstand isolated criticism. Theorists can always resist facts: for facts are hard to establish and are always changing anyway, and ceteris parabus can be made to absorb a good deal of punishment. Inevitably, at the first opportunity, the mind slips back into the old grooves of thought, since analysis is utterly impossible without a frame of reference, a way of thinking about things, or, in short, a theory.

Herein lies the secret of the General Theory. It is a badly written book, poorly organized: any layman who, beguiled by the author’s previous reputation, bought the book was cheated of his five shillings. It is not well suited for classroom use. It is arrogant, bad-tempered, polemical, and not overly generous in its acknowledgments. It abounds in mares’ nests or confusions … in it the Keynesian system stands out indistinctly, as if the author were hardly aware of its existence or cognizant of its properties: and certainly he is at his worst when expounding its relations to its predecessors. Flashes of insight and intuition intersperse tedious algebra. An awkward definition suddenly gives way to an unforgettable cadenza. When finally mastered, its analysis is found to be obvious and at the same time new. In short, it is a work of genius.

It is not unlikely that future historians of economic thought will conclude that the very obscurity and polemical character of the General Theory ultimately served to maximize its long-run influence. Possibly such an analyst will place it in the first rank of theoretical classics along with the work of Smith, Cournot, and Walras. Certainly, these four books together encompass most of what is vital in the field of economic theory: and only the first is by any standards easy reading or even accessible to the intelligent layman.

In any case, it bears repeating that the General Theory is an obscure book, so that would-be anti-Keynesians must assume their position largely on credit unless they are willing to put in a great deal of work and run the risk of seduction in the process. The General Theory seems the random notes over a period of years of a gifted man who in his youth gained the whip hand over his publishers by virtue of the acclaim and fortune resulting from the success of his Economic Consequences of the Peace.

Like Joyce’s Finnegan’s Wake, the General Theory is much in need of a companion volume providing a "skeleton key" and guide to its contents: warning the young and innocent away from Book I (especially the difficult chapter 3) and on to Books II, IV, and VI. Certainly in its present state, the book does not get itself read from one year to another even by the sympathetic teacher and scholar.

Too much regret should not be attached to the fact that all hope must now be abandoned of an improved second edition, since it is the first edition which would in any case have assumed the stature of a classic. We may stilt paste into our copies of the General Theory certain subsequent Keynesian additions, most particularly the famous chapter in How to Pay for the War which first outlined the modern theory of the inflationary process.

This last item helps to dispose of the fallacious belief that Keynesian economics is good depression economics and only that. Actually, the Keynesian system is indispensable to an understanding of conditions of over-effective demand and secular exhilaration: so much so that one anti-Keynesian has argued in print that only in times of a great war boom do such concepts as the marginal propensity to consume have validity. Perhaps, therefore, it would be more nearly correct to aver the reverse: that certain economists are Keynesian fellow travelers only in boom times, falling off the bandwagon in depression.

If time permitted, it would be instructive to contrast the analysis of inflation during the Napoleonic and first World War periods with that of the recent War and correlate this with Keynes’ influence. Thus, the "inflationary gap" concept, recently so popular, seems to have been first used around the Spring of 1941 in a speech by the British Chancellor of the Exchequer, a speech thought to have been the product of Keynes himself.

No author can complete a survey of Keynesian economics without indulging in that favorite indoor guessing game: wherein lies the essential contribution of the General Theory and its distinguishing characteristic from the classical writings? Some consider its novelty to lie in the treatment of the demand for money, in its liquidity preference emphasis. Others single out the treatment of expectations.

I cannot agree. According to recent trends of thought, the interest rate is less important than Keynes himself believed … As for expectations, the General Theory is brilliant in calling attention to their importance and in suggesting many of the central features of uncertainty and speculation. It paves the way for a theory of expectations, but it hardly provides one.

I myself believe the broad significance of the General Theory to be in the fact that it provides a relatively realistic, complete system for analyzing the level of effective demand and its fluctuations. More narrowly, I conceive the heart of its contribution to be in that subset of its equations which relate to the propensity to consume and to saving in relation to offsets-to-saving. In addition to linking saving explicitly to income, there is an equally important denial of the implicit "classical" axiom that motivated investment is indefinitely expansible or contractible, so that whatever people try to save will always be fully invested. It is not important whether we deny this by reason of expectations, interest rate rigidity, investment inelasticity with respect to over-all price changes and the interest rate, capital or investment satiation, secular factors of a technological and political nature of what have you. But it is vital for business-cycle analysis that we do assume definite amounts of investment which are highly variable over time in response to a myriad of exogenous and endogenous factors, and which are nor automatically equilibrated to full employment saving levels by any internal efficacious economic process.

With respect to the level of total purchasing power and employment, Keynes denies that there is an invisible hand channeling the self-centered action of each individual to the social optimum. This is the sum and substance of his heresy. Again and again through his writings there is to be found the figure of speech that what is needed are certain "rules of the road" and government actions, which will benefit everybody, but which nobody by himself is motivated to establish or follow. Left to themselves during depression, people will try to save and only end up lowering society’s level of capital formation and saving; during an inflation, apparent self-interest leads everyone to action which only aggravates the malignant upward spiral …






(from Newsweek, October 7, 2002, p. 50)

We are at a loss for words. If nothing else, this baffling economy has defeated the vocabulary of economics. We are supposed to be in a “recovery,” but it doesn't feel like one. The stock market is down 26 percent this year and has lost $3.4 trillion in value, reports Wilshire Associates. The weekly initial claims for unemployment insurance, after receding earlier this year, have climbed again above 400,000. Consumer confidence has declined for four consecutive months.

Our language seems increasingly disconnected from ordinary life. The standard phrases of the business cycle suggest simple rhythms of pain and pleasure. Recessions are bad; recoveries are good. The boundaries are neat. But the reality is usually murkier. The boundaries aren't so neat and our labels often mislead.

Even when the economy under performs -- is clearly in recession -- prosperity is widespread. Most people remain employed. Almost all are spared historic hardships (starvation, homelessness). Most enjoy unprecedented material well being. Just last week the Census Bureau reported that inflation-adjusted median household income had dropped 2.2 percent in 2001 to $42,228. Still, that was almost 25 percent higher than in 1975. Married couples have an astounding median income of $60,471 (meaning half of couples are above that and half below). The inflation-adjusted gain since 1975 is 40 percent.

The rhetoric of recession is usually, though not always, worse than the reality of recession. Since World War II, recessions -- signifying falling production and rising unemployment -- have become less frequent and milder. From 1946 to 1998, the economy has spent about 15 percent of its time in recession, reports economist J. Bradford De Long of the University of California, Berkeley. From 1901 to 1930 the comparable figure was 30 percent.

It seems ungrateful not to acknowledge our good fortune. But we don't. Americans feel entitled to an anxiety-free affluence. The mere existence of the business cycle offends those expectations. It sows uncertainty and shakes our sense of serenity. Even the declaration of a “recovery” usually isn't reassuring because, in its early stages, the recovery doesn't differ much from the preceding recession.

This is surely true now. One hour brings good news, the next bad. Last week: early Thursday, the government reported that new-home sales had risen 1.9 percent in August to 996,000 (at an annual rate). Later that day SBC -- the phone company -- announced 11,000 layoffs. And there's the stock market. Barring a big rally, the market will decline in 2002 for the third consecutive year. According to Howard Silverblatt of Standard & Poor's, the last time the S&P index of 500 stocks fell for three straight years was from 1939 to1941 (the declines were 5.5 percent, 15.3 percent and 17.9 percent, compared with 10.1 percent and 13 percent for 2000 and 2001).

The false precision of our economic language dates only to the last 50 years or so. Before that, language was less scientific. In the 19th century “people knew there were good times and bad times. The metaphors they used were more biological,” says economist Philip Mirowski of Notre Dame. “People had an image that [industry] had eaten too much and thrown up.” To wit: companies had produced more than people would buy; gluts led to “depression”; prices, profits and production declined.

In 1913 Wesley Clair Mitchell, a professor at Columbia, published his classic “Business Cycles and Their Causes,” which began: “Between 1890 and 1910 the United States had five seasons of business revival following upon periods of business depression.” The seasonal analogy depicted a gradual shift from depression to prosperity. But it was Mitchell who pioneered better statistical measures of business cycles. In 1946, he and Arthur Burns (who later became chairman of the Federal Reserve) completed a chronology of 22 U.S. business cycles from 1854 to 1938.  Each had exact starting and stopping points.

Ever since, the National Bureau of Economic Research -- an academic group that Mitchell helped found -- has designated the beginning and end of recession. (“Depression” slipped from the vocabulary because after the Great Depression of the 1930s, “everything else was so mild,” says Harvard economist Gregory Mankiw.) The NBER usually delays its dating until well after the fact. It says the last recession began in March 2001 and hasn't declared an end. But most economists have argued that the recovery started in early 2002.

The label doesn't yet fit. The problem transcends confusing economic indicators and the uncertainties of a possible war in Iraq. This business cycle has distinctive features: the size of the stock market decline; the economic weakness in Europe and Japan; the magnitude of the telecommunications collapse. These features confound comparisons to the recent past because they're so different from what we've experienced since the end of World War II. All the charts and experts can offer only little guidance. It suggests that this cycle may still surprise, and, perhaps, unpleasantly.






(from The Margin, September/October 1989, p. 30)

"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist."

Economist John Maynard Keynes wrote these words in his 1936 treatise, The General Theory of Employment, Interest and Money. They were marvelously prophetic. Perhaps no other economist has had so great an impact on economic affairs as Keynes. His influence on economic policy has been far-reaching. His General Theory revolutionized the field of political economy. His ideas have touched us all.

John Maynard Keynes (pronounced "kanes") was born on a summer day in 1883 in Cambridge, England, to intellectual parents. His father, John Neville Keynes, registrar to the University of Cambridge, was a well-regarded logician. John Maynard's mother, Florence Keynes, devoted her energies to public service; she served as mayor of Cambridge.

Young Keynes was a clever, inquisitive lad. By the age of four he began to understand rather complicated monetary issues such as how interest rates worked. At prep school, he revealed a gift for commercial organization. He is said to have hired a schoolmate to work as his "slave" – the boy carried Keynes' school supplies round campus in exchange for assistance with homework.

Keynes asserted a diplomatic flair in dealing with another boy whom he disliked: he offered to give the offensive child one book per week in ex- change for a promise that the boy wouldn't come within fifteen yards of him.

Because of his intellectual prowess, Keynes won a full scholarship to Eton, England's finest secondary school, and then won a full scholarship to King's College, Cambridge, where he majored in math.

He was a great success at Cambridge. Economic historian Robert Heilbroner sums up his college days: "Cambridge was to be a triumph. Alfred Marshall begged him to become a fulltime economist; Professor Pigou – Marshall's heir to be – had him to breakfast once a week. He was elected Secretary of the Union, a post automatically carrying an eventual presidency of one of the most famous nongovernmental debating societies in the world … He climbed mountains … bought books; stayed up in the small hours arguing; shone. He was a phenomenon."

After receiving his degree, Keynes left academic life, hoping for a job that would earn him more money. He turned to the civil service, accepting a post in India in 1907.

Keynes felt stifled by the job. He later commented icily that his only important duty had been making arrangements to ship a pedigree bull to Bombay. He was miserable and bored, but the lack of intellectual challenge from his work gave him energy to devote to other pursuits. He chose to analyze Indian finance.

In 1909 Keynes left the civil service and returned to Cambridge to teach. He became editor of the Economic Journal, an influential publication, and in 1913 he published Indian Currency and Finance, a book that earned him respect for his insight into monetary issues.

With the outbreak of World War I, Keynes returned to civil service, initially as an unofficial and unpaid consultant to the Treasury. His mastery of financial issues and diplomatic flair led to a rapid climb up the Treasury ladder, however, and by the end of the war, he held a position equivalent to an assistant secretary. In 1919, he resigned his post in protest against British diplomatic policies and returned to Cambridge.

After the war Keynes started trading in commodities and currencies. He spent half an hour in bed each morning poring over financial statistics and reports and making phone calls. Through these modest efforts he parlayed an initial investment of a few thousand pounds into an enormous fortune, which, in today's terms, would have made him a millionaire several times over.

While attending "The Good-Humored Ladies," a ballet performed in London by the Russian Diaghilev Ballet, Keynes was enraptured by Lydia Lopokova, the celebrated beauty who danced one of the major roles. Later, at a party hosted by mutual friends, Keynes met the stunning Lopokova, who spoke very little English but who nonetheless captivated the Cambridge don. In 1925 the seemingly mismatched pair wed, and they remained happily married for the rest of Keynes' life.

Not long after the American stock market crash of 1929, Keynes published A Treatise on Money, in which he began to depart from the so-called "classical economics." By 1936, after visiting the Depression-stricken United States and witnessing the economic deterioration throughout the Western world, Keynes published The General Theory of Employment, Interest and Money, a book that turned classical economics on its head.

Keynes' work took issue with the classical notion that the economy would automatically achieve equilibrium at full employment. Keynes agreed that the economy tended toward equilibrium but argued that equilibrium didn't necessarily occur at full-employment. He argued that the economy could stall at an employment level far short of the full-employment ideal and that it could remain stalled for an indefinite amount of time.

The length and severity of the Great Depression suggested support for Keynes' assertions. But he wasn't content simply to explain the problem. He offered a solution. Where private industry failed to provide the investment, and thus the employment and the income necessary to get the economy back on its feet, government could come the rescue. Keynes advocated large-scale government spending as a means of restoring economic health.

Keynes did not live to witness the importance his General Theory would have on economic policy making, but he was well aware of the impact his book would have. In a letter he wrote to George Bernard Shaw shortly before completing the manuscript, Keynes wrote, "you have to know that I believe myself to be writing a book on economic theory which will largely revolutionize – not, I suppose at once, but in the course of the next ten years – the way the world thinks about economic problems."

Keynes spent the remaining decade of his life traveling around the world on various diplomatic and intellectual missions. Although he was quite involved in cultural and commercial concerns as well, his activities were curbed somewhat by a heart condition. In the spring of 1946 Keynes and his wife took a vacation to their country cottage in Sussex, England. There Keynes died, of heart failure, at the age of 63.

Of his own brilliantly successful career, Keynes is said to have regretted only one thing: missing the chance to have drunk more champagne.






(from Newsweek, November 2, 1981, p. 21)

Economists and economics have never been as visible, audible and publicized as they are now.  Nor have the disagreements and divergent forecasts within the profession ever been as rife.

One consequence of this babble of prophecy is that the repute of economics and its practitioners has fallen to one of the lowest points in the 200 years since publication of The Wealth of Nations.  The reason is simply that the testimony of professional economists is offered on almost any side of each major economic-policy issue. 

Is the Reagan tax program inflationary?  "Yes," says Walter Heller.  "No," says Milton Friedman.  "Not necessarily," says Murry Weidenbaum.  How do high interest rates relate to inflation?  "They contribute to it" (through indexing and cost-of-living adjustments), says economist X.  "They result from efforts to control it" (through tighter monetary policy), says economist Z. 

How will interest rates behave in the next year?   Why has the dollar appreciated 30 percent against some European currencies in the past year?  Will lower marginal tax rates raise or reduce revenue?

On these and other key issues, the opinions of economists are spread as widely as forecasts of next month's weather.

As economists can be found on any side of these questions, the public has come to suspect that they are available as "hired guns" - whoever has a particular interest in espousing some economic policy can find some reputable economist to endorse it.  It is one thing for lawyers to have such a reputation.  For lawyers are trained to be advocates: experts in organizing the best possible case for either side of an issue.

The analogy is admittedly imperfect.  In general, any reputable lawyer can be found to defend almost any legally tenable position.  The situation for economists is a bit different: it seems there's always some economist willing to back any side of most economic-policy issues.

But economists are supposed to be scientists: schooled in seeking, testing and finding "truth," and in acknowledging error when they encounter it.  Even if their science is "dismal," it's still supposed to be science.  Why then are their disagreements so sharp?  There are four reasons.

  1. Economists use different benchmarks (often not spelling them out).  When Brookings economist George Perry asserts that Ronald Reagan's tax plan is inflationary, he is taking as his benchmark the Reagan expenditure budget already enacted by Congress.  (The tax reductions are inflationary given that budget.)  When Friedman and others rebut Perry, they're comparing Reagan's package of lower budget and lower taxes with the higher budget and higher taxes of Jimmy Carter's original program for fiscal year 1982 - a different benchmark.  (A deficit of specified size will have a smaller inflationary impact at a lower level of total government spending: the Reagan budget for 1982 involves a lower spending level than the Carter budget it replaced.)

  2. Economists often make different assumptions about the time period to which their conclusions apply.  When Yale economist James Tobin asserts that lower tax rates will increase consumer spending, and macroeconomist Michael Evans contends instead that they will stimulate investment, each has a different period in mind: Tobin's is short-run.  Evans's is longer-run.

  3. Economists are usually reluctant to acknowledge the full extent of their ignorance.  One of the great economists of an earlier age, Frank Knight, made a distinction between "risk" (knowing the odds), and "uncertainty" (not even knowing enough to calculate them).  Ignorance is another name for this kind of uncertainty.  And the plain fact is that economists share a degree of ignorance whose extent they are understandably loath to admit. 

    We are on relatively solid ground in the domain of microeconomics - determination of prices in competitive or monopolistic markets, predicting the effects of minimum wages on employment and so on.  Our ignorance is formidable in the domain of macroeconomics: the interactions among monetary policy, tax policy, government spending and government regulations in determining aggregate employment, investment and inflation.  For all these effect depend on expectations: what is expected to rise, consumer spending will tend to aggravate the rise and vice versa. 

    But the embarrassing truth is that we just don't know how expectations are determined: whether they're "adaptive," based on recent experience; or "rational," based not only on experience but also on estimates of how this experience will be altered as a result of "expected" government action or inaction and other "relevant" factors.

  4. Finally, economists have differing values.   Just as there are deep ethical divisions among physicists and engineers over the development of new weapons systems, economists sometimes (often?) disagree on economic policies for reasons of pure (or impure) ideological preference.

When John Kenneth Galbraith decries cuts in minimum social-security benefits or in student loans, he's probably motivated about equally by a distaste for the market's solutions (or a disbelief in their adequacy) and a predilection for government action to remedy them.  When Friedman argues in favor of those cuts in government programs, his convictions are no doubt equally strong in the opposite direction: enthusiasm for the market's solutions and a distaste for the failures of meddlesome government.

Moreover, these normative differences are not less real than those that led Edward Teller to argue strongly for ballistic-missile defense and Herbert York to argue with equal vehemence against it.

Recently I had occasion to consult consecutively three orthopedic surgeons about a ligament injury: one recommended immediate surgery; the second suggested a cast for six weeks and then surgery, maybe; the third proposed rest and rehabilitation.

Perhaps economics doesn't look so bad if it's compared with medicine, whether this should be viewed as ground for solace or grief is another question.






(from US News & World Report, November 2, 1982, p. 73)

Government officials say that the country is on the road to economic recovery, but hundreds of thousands of unemployed workers see no quick end to their bitter troubles. One of them is John Worrall, 37, a Pittsburgh-area steelworker laid off for more than a year. Below, he tells how joblessness has changed his outlook and the plans he had for his wife and children.

McKeesport, PA

Having put 17 years of my life into the mill, I can't help but be angry as l sit here out of work, with no prospects of a job, and a wife and two kids to support. Except for a couple of weeks' work at the mill last Christmas, I haven't seen a paycheck since August of 1981.

I don't know who to blame – myself, the government, the company or the union. One thing's for sure: I feet betrayed.

When I first got on with the company, I was just 20 years old; my father had been a steelworker, and I was told by relatives that I'd be set for life if I went into the mill. All I had to do was keep my nose clean, and I'd always have a job – just like my dad did. Those steady paychecks, good health-insurance benefits and nice vacations every year all looked very attractive.

Because I started work at the mill so young, I figured by the time I reached 50, I'd have my 30 years in and could retire. My kids would be grown by then, and between the equity I'd have in my home and savings, I could start my own business. With a pension check, I thought I'd have a good chance of success, too, because I could afford to plow everything right back into the business.

But now I regret that decision. At the time, I was working in a filling station, and I wish I hadn't let my relatives talk me out of the plans I had to buy my own station. By now I would have had 17 years in business and some real security – instead of having to scratch for my next meal.

Now I'm in the final 13 weeks of unemployment compensation, which means l have $198 coming in each week until December; in addition to the $57 in food stamps we've been getting right along each month.

I want us to avoid more welfare as long as possible. It's not that I think it's wrong. If I have to accept welfare to put food on the table, I'll do it. But taking welfare is a big step for me. I've always thought that people on welfare didn't want to work and that anyone who wanted a job in this country could find one. Now I'm not so sure.

I've been spending a lot of time putting applications in for work all over the place, and I've concluded that there are a lot more people hunting work than there are jobs. It used to be that when one steel mill slacked off, you could find work at another. But this entire valley is dead. I can't even get a job pumping gas and, believe me, I've tried. Even my wife, who has been a full-time housewife since we were married, can't find a simple waitress job.

Friends help out. I don't know what we would have done without our family and friends. It seems like they take turns helping us with a little bit of food or money to tide us over.

When our hot-water tank burst and flooded the basement, we didn't know how we'd manage because we no longer have any credit. But a friend who is also a laid-off steelworker bought one for us on his credit and trucked it over. This guy's struggling to survive himself, but he didn't think twice about doing it. That's the kind of thing that keeps you going when you're down.

When I look around at friends from the mill who are getting divorced or losing their homes, I wonder, "Am I next? Is my marriage going to fall apart? Am I going to lose the home I've worked for all my life?"

I can't help but be depressed. I've felt unneeded and useless – that this family is being supported by the government, not by me. I get embarrassed going to the bank for food stamps and standing in line to redeem them at the market. It digs into your pride.

I know that all of this has made me miserable to live with and that I haven't been a very good husband or father since this began.

It seems like all I ever have on my mind are bills and how I'm going to pay them. I wake up in the morning thinking about them, and the collection agencies don't make it any easier. They hound me by mail and telephone day after day, wanting to know why I'm not paying. Telling them your situation and promising to pay a little bit each month does no good. They won't listen.

My top priority has been to make the mortgage payments of $370 a month on our house and keep up with the utilities, because I want my wife and kids to have a roof over their heads. But that means I've slipped behind on other debts. I'm six months behind on the car payments, and I know that any day now it will be repossessed.

Sometimes the problems seem so overwhelming that I think about leaving home, that maybe my family would be better off without me. But I've never been a quitter, and I'm not going to start now.

If worst comes to worst and I'm not called back to the mill, I’ll just start all over again. I'm not sure how, exactly. I know we won't leave the area. Our families are here, and from what I read in the newspapers, things aren't much better anywhere else. I'm always hearing about people who've spent every last dime they had to move away and then come back in worse shape than when they left.

Maybe we'll sell everything we have and try to start that business I've always wanted. I feet like I built my life the same way you build a house. I built the foundation, the walls, and then the roof. But now I'm back in the basement again. The only thing I haven't lost is faith in myself.




Copyright © 1996 Amy S Glenn    
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