Relevant and even prescient commentary on news, politics and the economy.

UnReal Business Cycle

Via Dr. Black, those RBC models may be missing a variable or two:

In April, the rate in the United States rose to 8.9 percent. When the European figures are compiled, it seems likely that the American rate will be higher for the first time since Eurostat began compiling the numbers in 1993….

First, it appears that the safety nets in many Western European economies made it easier for people to keep their jobs as the economy declined. In Germany, programs allow companies to get government help in paying workers, for example, keeping them employed. If the recession becomes severe enough and long enough, of course, it could turn out those programs do not so much avoid the pain as defer it.

Because the alternatives are either direct government unemployment benefits on top of a decrease in GDP or a decline in social welfare with generational implications.

Another factor may be the lack of an economic boom in many European countries, which has left them less vulnerable to recession-related cutbacks.

Ah, pure RBC theory: the seeds of the next recession are sown in the economic growth that preceded it, even if that growth was somewhat enhanced by long-term liabilities:

Interesting, not unrelated, notes:

Then, the United States had an unemployment rate of 4.7 percent, lower than all but three of the 15 European Union countries — Denmark, the Netherlands and Ireland — and equal to that of a fourth, Luxembourg.

As the graphic shows, the March rate for the United States was higher than the rates of 11 of the 15. The exceptions were Portugal, which has the same rate, and Spain, Ireland and France.

The Irish story was truly a country-wide “miracle,” now featuring both higher highs and lower lows than even the U.S.

Spain and Ireland, two of the highest unemployment countries in Western Europe, suffered housing booms and busts that were comparable to the cycle in the United States.

Spanish banks hit the news earlier this week. U.S. banks are evermore heavily subsidized by the U.S. taxpayer (or that taxpayer’s debt; see above). Or, as Robert Lucas told Arjo Klamer in May of 1982:

But I don’t think unemployment is at the center of the story [of the Great Depression]. For those who do think it is the center, I can see why they don’t look to me for enlightment.

What a difference 27 years makes.

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Nobody Could Have Predicted, Volume CCCXL

McGill University Macroeconomics Comprehension Exam, May 2003, Question 10 (Essay):

The stock market bubble burst in the spring of 2000. The popular pres now talks about a housing bubble, referring to ever rising prices of houses in North America (and elsewhere). They say that if the housing bubble bursts it will have a much more severe effect on the economy. Do you agree? Sketch a model that would capture your argument.

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Bleg: James Tobin and Paying for the Viet Nam War

In Conversations with Economists (h/t Kevin Quinn at Econospeak), James Tobin refers to LBJ having made “a mistake” in “raising taxes to pay for the Viet Nam War.”

Google Desktop can’t find the line of reasoning behind that in any of Tobin’s papers that have survived my migrating possibly-non-OCR PDFs over about six computers. Anyone able to point me to Tobin’s preferred alternative?*

UPDATE: The full quote:

Klamer: We experience stagflation….How would you account for this experience within a neo-Keynesian neoclassical framework?

Tobin: That gets us into the history of the economic world in the US since 1966. Probably there were some mistakes in demand management policy. I wouldn’t deny that. In fact, it was a council of neo-Keynesian advisors that told Johnson he should raise taxes for the Vietnam War.

Is this just a reference to the mismanagement pgl has discussed here and at Econospeak so often? And is there evidence that the advisors were arguing that the war was the reason to raise taxes?

*That’s “given that the War was in progress anyway”; not funding and not fighting was not an option, no matter how preferable it might have been without the presence of Dr. Manhattan and his “glowing blue schlong.”

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