Saturday, September 22, 2012

Teetotal albino vegies

Opportunity cost is a concept that economists believe they understand better than the common man. Looking at economic blogs, this is far from obvious. In summer, the common man is busy sunbathing on a beach, barbecuing with the family or meeting friends in the biergarten, but the economic blogger keeps on blogging. This is most puzzling. Either those economists do not understand the basic concept of opportunity cost, or they are teetotal albino vegies. Whatever, it looks like rain is back for good, and so is Economics for the 98% (a blog very sensitive to opportunity costs). As a re-start, let's look at some interesting contributions those puzzling economists recently made.

Stephanie Flanders: there are less good
looking economic teachers (photo BBC)
Firstly, there is a BBC documentary from Stephanie Flanders on Keynes. It's very unusual to watch sensible economics on tv, and for that reason alone, it's worth watching. Non-economists will never have a chance of learning as much in so little time, while confirmed academicians might want to seize the opportunity of re-discovering Keynes, now that he is more relevant than he ever was in the past 80 years.
But there is more than meets the eye. Towards the end of the film, you hear some economist (Ken Rogoff if I'm right) questioning whether governments today are conducting too little or too much keynesian politics. The question is not discussed further, and most neo-keynesian and neo-classical economists would have clear (and opposed) answers to it. And I would unsurprisingly side with the neo-keynesians. Yet, I can't refrain from having a doubt. The neo-keynesian argument relies on the hypothesis of a growth path from which the economies deviate, and onto which they will return if helped by appropriate fiscal and monetary policies (allowing for the repayment of debts in the long run). Such a growth path may have existed in the past, but there's a doubt that it still exists.
Here is the BBC link if you live in the UK, and here is the youtube one, if you don't.

Next is a post from Jonathan Portes, in his Not the Treasury View blog. He recalls the events he lived from the inside 20 years ago, when the Pound departed from the Exchange Rate Mechanism. It's an interesting view of politics clashing with economics, while Black Wednesday remains one of the best example of how a developed economy may benefit from devaluation or put it another way, suffer from fixed exchange rates. By the way, Chris Dillow talks of "Golden Wednesday".

Many people associate Black Wednesday with George Soros, for good or bad reasons (I'm tempted to say bad reasons, because I side with Chris in preferring Golden Wednesday). In a much talk-about article, Soros makes the case for Germany to lead ("pay" as translates Hans-Werner Sinn, a conservative German economist) or leave the euro. The argument is not new, but it is all the more convincing now as the debate on the euro slowly progresses among the minds of the European intelligentsia.

On a more technical note, Simon Wren-Lewis uses simple words to explain the difference between Quantitative Easing and money printing. It may not be entirely convincing, but it is a good description of what leading economists and central bankers have in their mind. The main point (if I understood correctly, and as I commented) is that QE can be reversed in order to avoid inflation, but helicopter money can't. Of course, a government may still avoid inflation by reversing fiscal policy, but even a German government would hesitate to do that. So, the real difference between QE and helicopter money is that QE keeps the policy in the hands of the central bank, and this is why a central bank may agree to QE, but won't even consider helicopter money.

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