Economics Headlines for the Week: 3/7/2011
Economics headlines from this week’s news, blogs, and op-eds.
It’s a bit fear mongering, but the spirit of the piece is in the right place. Just a spoiler, the four things are:
1. Wealth gap: Super-Rich vs class wars, death of democracy
2. Wall Street’s doomsday capitalism vs rule by anarchy
3. Pentagon’s perpetual war machine vs America’s budget time bomb
4. Global population explosion vs resources, jobs, better lifestyles
I agree with the author’s point that these four things are looming dangers to the U.S. economy and that the government should have done a better job of bringing to prosecution cases of financial fraud which helped cause the crisis: from mortgage underwriting to securitization.
Did the financial crash help drive the economic crisis, or the economic crisis cause the financial crash? A good question, but I think the blog author misses the point a bit in his analysis. Krugman is for all intents and purposes a neo-Keynesian of sorts, so his argument is likely more nuanced than it is portrayed here with both real and financial factors playing a role (price stickiness allows for all sorts of interesting financial freezes). I believe Krugman’s position is that there were real factors behind the rise in household debt that led to the housing bubble (such as stagnant real-wages over 40 years). This meant that consumers borrowed increasingly, and were highly illiquid as a result of the crash, as a result the economy could not adjust quickly enough. In fact he wrote a paper on the subject, see here.
We can then model a crisis like the one we now face as the result of a “deleveraging shock.” For whatever reason, there is a sudden downward revision of acceptable debt levels – a “Minsky moment.” This forces debtors to sharply reduce their spending. If the economy is to avoid a slump, other agents must be induced to spend more, say by a fall in interest rates. But if the deleveraging shock is severe enough, even a zero interest rate may not be low enough. So a large deleveraging shock can easily push the economy into a liquidity trap.
Support for Governor Scott Walker’s attempt to demolish the public employees unions’ right to collectively bargain in Wisconsin is waning. One Republican has already said he will vote against it, and only two more are necessary to defeat the bill. With public polls suggestion locals and the nation are against the bill, will state representatives finally act in the interests of their constituents. It seems as though much of what is happening has been posturing by Governor Walker for a potential presidential bid, but luckily with each passing day support for his draconian policies diminishes.
From a notoriously fear mongering blog, an article on why rising oil prices may lead to stagflation in 2011. Of course oil prices are central to the price on a wide range of goods, and in the current economic climate high oil prices would be disastrous. That being said I don’t know how much the global economy can sustain significantly higher oil prices without deflating. So of course the pressure could go either way, as is often the case in economics. But it is food for thought on the importance of the recent protests in the Middle East, oil prices, and the possible economic consequences.
For all their talk of being free-market, libertarian, tea-partying conservatives House Republicans have voted unanimously to continue subsidies to oil companies. This just in, Rand Paul and Ron Paul are two of the biggest hypocrites you’ve every heard of. This is one of my frustrations when it comes to so-called libertarians, they’ll talk all free market when discussing social services but as soon as big business interests come up its back to state-capitalism, subsidies, and corporate welfare.
Not really news because we all knew he was a liar anyways (he’s a politician after all). And, remember how he cut taxes in Wisconsin before declaring that he was serious about balancing the budget on the backs of public employees?