Comments on: Tracking economists’ consensus on money illusion, as a proxy for Keynesianism

By: Luke Lea

Luke Lea — Tue, 31 Mar 2009 09:38:42 +0000

Agnostic, the amazing increase in house prices, even allowing for the bubble and the general rise in the consumer price index, is driven by the rising costs of land in our major cities. Land has gone from roughly 10% to the total cost of a house in 1984 to close to half today in the Midwest and Southeast. On the West Coast it went from half to 90 percent. This is the old Henry George phenomenon abetted by the two-earner household. The numbers were recently estimated by the Federal Reserve. Here is the link: http://www.federalreserve.gov/Pubs/feds/2006/200625/200625pap.pdf

By: agnostic

agnostic — Mon, 30 Mar 2009 20:02:08 +0000

but eventually they start catching on when they notice they have less "stuff" than before

Of course there's the other half of the pattern -- as when people are amazed at how expensive houses are now, compared to their parents' or grandparents' houses that were bought for $10,000, or when people invariably whine about movie tickets costing more and more.

These aren't fleeting reflections. They're always in people's minds.

By: tehdude

tehdude — Mon, 30 Mar 2009 13:11:04 +0000

The question of whether they are fooled over time is much more relevant.

Sure, people don't notice the immediate loss from inflation, but eventually they start catching on when they notice they have less "stuff" than before and both parents have to slave away to make the family income.

At the heart of all this is the conceit that economic planners are invariably more intelligent than their subjects. I personally believe this stems from ancient anti semetic biases against businessmen and bankers, from the sense that they get their money by cheating instead of earning it with intelligence. These people being stupid in reality, it would be easy to trick them with the Keneysian Noble Lie.

By: Jim Glass

Jim Glass — Mon, 30 Mar 2009 10:51:17 +0000

One can also see money illusion at work in the behavior of the pizzerias of New York City.

By: valuethinker

valuethinker — Mon, 30 Mar 2009 10:15:26 +0000

1. Dean Baker at the Centre for Economic Policy has been calling for a housing slump since at least 2001, with good quantitative backup.

2. arguably so has Wynne Godley at Bard Institute (although more focused on the international adjustment)

3. Calculated Risk is a housing economist (an ex CFO/ CEO of a tech company). He's been around since at least 2004

4. Andrew Oswald at Warwick University had been writing newspaper columns calling for a housing slump since at least 2002. In fact, when in 2006 UK housing prices kept going up, he pulled from all public commentary.

5. There is, of course, the Economist which has been calling the housing bubble since at least 2002.

So 1 and 4 are academic economists at the very least.

By: asdf

asdf — Tue, 24 Mar 2009 12:52:39 +0000

B - (A and B) = average (non-economist) social scientist who is intimidated by math but can see economists are making crazy assumptions.

You forgot

(not A and not B) = socialist who understands neither math nor basic human psychology

By: PubMed

PubMed — Tue, 24 Mar 2009 11:50:37 +0000

Peter Schiff Video (3:07): "Of course we aren't going to pay the Chinese back." (audience laughs at the obvious)

When the bond bubble burts the USA will rapidly lose it's reserve currency status.
The result?
The USA's economic growth will slow by about 2.2% per year.
Gourinchas and Rey on Exorbitant Privilege

2.2% is a sizable hit when you consider that our economy grows by about 4% during good times and 1%+/- of that is simply immigration.

By: DiverCity

DiverCity — Mon, 23 Mar 2009 18:58:44 +0000

Schiller and Roubini in a class by themselves? Not so. Bill Bonner (Empire of Debt), Michael Panzner (Financial Armageddon), Eric Janzsen (iTulip blog), Marc Faber and Michael Hudson are but five of an admittedly small minority of economists, in addition to Schiff, who made the correct call. While Schiller has a modicum of modesty and humility, Roubini’s relentless self-promotion is embarrassing and just makes it seem as though he was the only economist to make the correct call. (Of course, Schiff is a relentless self-promoter as well but, at least to me, in an inoffensive way). Moreover, Roubini is a shill for corporatism and is not correct in what he claims will be the outcome of this mess.

By: PubMed

PubMed — Mon, 23 Mar 2009 10:37:48 +0000

Philip Greenspun's book report on...

The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities by Mancur Olson

Cliff notes: Special interests ultimately triumph over group interests. This unfortunate process drives productivity out of the economy and ultimately stagnation and decline ensues.

By: PubMed

PubMed — Sun, 22 Mar 2009 20:48:52 +0000

Video (5:43): Peter Schiff crushes fools long before the meltdown began

Video (1:16:27) Peter Schiff: Why the Meltdown Should Have Surprised No One

The first clip includes some great historical asskickings of Art Laffer and Ben Stein.

The second clip is a great speech that explains what happened to our bubble economy and where we are headed. Using just a few basic concepts from the Austrian school of economics Schiff predicted the meltdown with stunning accuracy.

By: Jay Fink

Jay Fink — Sun, 22 Mar 2009 18:41:47 +0000

Check out this prediction from 1998!

http://www.progress.org/archive/fold48.htm

By: sg

sg — Sun, 22 Mar 2009 17:39:39 +0000

Interesting that you brought up COLA. At shadowstats.com it is explained how in the 90′s the consumer price index was recalculated so it would be lower. I always find it interesting that college costs and medical costs are rising faster than inflation. I think that workers are in fact accepting lower nominal wages. I have several friends whose hours have been reduced, overtime and bonuses eliminated. Kinko’s employees voted to accept pay cuts instead of layoffs. UAW members are reportedly accepting cuts as well.

By: Luke Lea

Luke Lea — Sun, 22 Mar 2009 16:23:36 +0000

Don’t forget that unions were stronger back then and had negotiated COLA’s — automatic cost of living adjustments — to deal with inflation. In other words, they had learned from experience and no longer had “the money illusion.” That’s what caused stagflation — COLA’s didn’t exist when Keynes formulated his “special” theory of employment, which was based on the money illusion and designed to deal with the problem of the downward stickiness of wages, which was an historical phenomenon in the early 20th century. It will be interesting to see if workers today will be willing to accept lower nominal wages. More likely there will be a lot of inflation and they will once again be temporarily fooled by the money illusion, until they wake up and realize that real wages are lower than they have been in a long, long time. The last time this happened (a big bout of inflation) was in the early 1970′s, which not coincidentally was when real hourly wages reached there peak. Since then they have been trending steadily downwards, a phenomenon obscured by the fact that median family income has remained stable. It remained stable because of the two-earner family and longer workweeks.

By: Steve Sailer

Steve Sailer — Sun, 22 Mar 2009 13:58:29 +0000

Having lived through all this, let me fill in the background. "Money Illusion" was a key concept behind the Keynesian Philips Curve idea that dominated in the 1960s. The notion was that a small amount of inflation would cut unemployment because people who were sitting around collecting unemployment would get offered higher wages for a cruddy-sounding new job than they expected, so they'd get off their duffs and get back to work earlier than if there were no inflation. But it was all just a trick played on the lazy sods because the wages they were being offered weren't higher in real terms, just in nominal terms.

Of course, in the 1970s, people figured out that they were being tricked, so we had stagflation: higher inflation and higher unemployment at the same time, contra the Philips Curve.

That hurt Keynesianism's reputation.

Further, there were unpopular non-illusionary aspects to Money Illusion, such as the fact that as your wages went up to keep pace with inflation, you kept getting bumped up into higher marginal tax brackets, so inflation was making you worse off. Supply Side economics gained a lot of popularity from this mechanism.

By: gene berman

gene berman — Sun, 22 Mar 2009 10:11:52 +0000

Agnostic:

Regarding your statement about the Austrian antipathy to logical positivism, I'd suggest you actually read what Mises had to say on the subject. There are about a half-dozen scattered (index) references in HUMAN ACTION and a lengthy treatment in the chapter devoted to the impossibility of economic calculation under socialism. Then tell me what might be your objection to the Austrian view. To gather some appreciation of the importance of this insight, it's the essence of the reasoning that led Mises to predict--in 1920-- that one day, the USSR would "collapse like a house of cards, simply cease to exist." Those who do not understand this understand virtually nothing of economic science.

By: Zora

Zora — Sat, 21 Mar 2009 15:48:58 +0000

Richard Sharpe wrote: I wonder how you quantify an imponderable, or is that just more mental masturbation?

Is it mental masturbation to say that there are processes that will affect environmental and human welfare that we don't yet know how to measure? Frex, to pick an example doubtless dear to many hearts here, bureaucracy can be grossly inefficient. Even if it's not corrupt.

Talking about efficiency only in terms of money (money as measured and recorded) is acting like the drunk who was asked why he was crawling on his hands and knees around the lamppost. Answer: he had dropped his keys somewhere in the last block. Question: Why, then, are you only looking near the lamppost? Answer: because that's where the light is.

I agree that it would be good to have some sort of measure for the imponderables I mentioned. Perhaps it should be in kilowatts or calories rather than currency?

By: Roger Bigod

Roger Bigod — Sat, 21 Mar 2009 14:13:21 +0000

The first rule of economics is that you can not talk about economics without treating it as a form of religion. At least in “advanced” countries, you either think that the rich are deserving and redistribution of income a vile crime against nature, or you think the less rich are deserving and redistribution is all that keeps us hanging by our fingernails above an pit of savagery. This pollutes any attempt at rational discussion.

The locus classicus is a well-meaning professor trying to explain things to a student with a trust fund. They might as well be from different planets.

By: Richard Sharpe

Richard Sharpe — Sat, 21 Mar 2009 07:51:05 +0000

if not, regulation should supplement the market.

Note that human social groups/organizations may be more or less efficient, that the nurture of human capital (health and education) is part of efficiency, and that imponderables such as generalized social trust can make a big difference in social functioning.

I wonder how you quantify an imponderable, or is that just more mental masturbation?

By: Luke Lea

Luke Lea — Fri, 20 Mar 2009 22:59:19 +0000

Here is a great post by an insider (ie, a trader on Wall St.) on what went wrong at AIG: http://www.acredittrader.com/?p=65

Part math, part psychology.

By: Zora

Zora — Fri, 20 Mar 2009 17:49:50 +0000

SG: Rather than profit, or ROI, in financial terms, perhaps what we really ought to be charting is ecological efficiency. That is, how much energy/water/arable land/mineral wealth and so on that we're using, how much we're polluting our environment and thus affecting our future welfare, and most important, how EFFICIENTLY we're using the resources that we do use.

An industrial process that uses fewer raw materials and less energy to produce a more useful, recyclable product should be rewarded. The market may or may not recognize this efficiency; if not, regulation should supplement the market.

Note that human social groups/organizations may be more or less efficient, that the nurture of human capital (health and education) is part of efficiency, and that imponderables such as generalized social trust can make a big difference in social functioning.