Political Philosophy and Economics

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profette_IHB

profette_IHB

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The NY Times has an interesting piece contrasting Obama and Clinton on their economic policies.

Clinton:

"The easiest way to describe Senator Clinton’s philosophy is to say that she believes in the promise of narrowly tailored government policies, like focused tax cuts. She has more faith that government can do what it sets out to do, which is a traditionally liberal view. Yet she also subscribes to the conservative idea that people respond rationally to financial incentives."

Obama:

"Senator Obama’s ideas, on the other hand, draw heavily on behavioral economics, a left-leaning academic movement that has challenged traditional neoclassical economics over the last few decades. Behavioral economists consider an abiding faith in rationality to be wishful thinking. To Mr. Obama, a simpler program — one less likely to confuse people — is often a smarter program."
 
That, and $1.69, will get Edwards a cup of coffee at Denny's. The current understanding of economics in this world is in direct inverse proportion to the number of economists that claim their theory is the right one. You can't call it "science" when they can't even agree on a school of thought, much less sort out the opposing theories within those schools. If I were running for President, I'd distance myself from any endorsement from someone calling themself an economist. I'd rather be endorsed by a guild of astrologers; they have a higher record of accuracy
 
Sorry, changing the topic a little for a more economic focus (ie. what the economists might try instead of the politicians)

I ran into this old speech by Bernake, found it interesting, so posting below. Basically, I don't see why his ideas on preventing deflation would work. Firstly, if the Fed just gives money away to consumers and banks, there's no guarantee they'll spend the money on domestic stuff. Nothing there to prevent hording and doing the carry trade trick (ie. invest overseas with the free money). Secondly, this quote of why it'll work in the US but not Japan doesn't seem to ring true today.

"First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan. "

Remarks by Governor Ben S. Bernanke

Before the National Economists Club, Washington, D.C.

November 21, 2002

Deflation: Making Sure "It" Doesn't Happen Here

http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm
 
I believe both Abama and Clinton are right - people respond to very simple financial incentives.

I am still not fully understanding why deflation is something that so desperately needs to be avoided - does it really hurt me - the regular middle class person who would really like to see prices fall a bit?? Or is it one more type of trickle down theory - impacts big business which will *supposedly* then hurt me?
 
Deflation is bad. Very bad. Deflation isn't falling prices.

Okay, it is falling prices, but it is falling prices in such way that it sets the expectation for falling prices and leads to a halting of investment and consumption because tomorrow's price will be better than today's price.

New factories are not built. Major purchases are postponed. Infrastructure is not built. etc. Which leads it less need for labor. Which leads to further decreases in demand. Which leads to even less investment in infrastructure and capital goods. Which leads to less labor. Which leads to less demand ...

And so on...
 
If true capitalism is at work then shouldn't things only fall in price because there is no more demand for them. Since there is no true capitalism and we regularly practice corporate welfare among other types of monetary shenanigans then shouldn't we allow for some deflation in the same way we allow for some inflation - I don't see how you can have one without having the other.
 
I am no economist, but I understand No Such R is correct, deflation is way worse than an equal amount of inflation, historically speaking.
 
What you refer to as true capitalism does not care about what should or shouldn't happen. And capitalism is not perfectly efficient. That said, every other ism is less efficient.
 
Anonymous said : "if the Fed just gives money away to consumers and banks, there's no guarantee they'll spend the money on domestic stuff. Nothing there to prevent hording and doing the carry trade trick (ie. invest overseas with the free money)."

Sorry Anonymous, but I think that any danger associated with large numbers of Americans saving money instead of spending it is too remote to consider possible.
 
No Such Reality, though you are correct about the impact of deflation, you make a common mistake about what deflation actually is.

The impact of deflation (or inflation) on prices is an effect of deflation (or inflation). It is not a definition of the term.

Both deflation and inflation are monetary illnesses caused by an imbalance between the supply of money in an economy and the demand for goods/services in that economy. In the case of deflation, there is not enough money to meet demands of the economy. Therefore the laws of supply and demand dictate that prices will drop until an equilibrium is created. Of course, this can feed upon itself in the form of delayed investment and a deflationary spiral can occur.

The question about our own economic future is dependent on the outcome of inflationary and deflationary forces at work in our economy right now. On one side, billions/trillions of dollars are being vaporized with the collapse of the housing market, and the economy is prevented from getting more money by the seizure in the credit markets.

Benny and the Ink Jets are doing everything imaginable to combat these deflationary forces.

While it remains to be seen whether inflationary or deflationary forces will eventually win out, what is happening now is a vivid example of why the best economic policy is one of minimalism. We wouldn't be in this mess right now if Alan Greenspan realized that the business cycle was a good thing and that occasional mild recessions are far easier to endure that what you have to face if you try to manage forces that you don't understand.
 
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