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We are snowed in so it seemed like a good time to plow through these comments on Austrian economics. There has been a lot of heat but the snow is not melting. Poor metaphor, I guess. Let me observe first that an economy is a highly complex phenomenon. There can be several ways to understand it. There can be several ways to define problems for solution. However, the solutions will not be interchangeable. That means the solution to one defined problem is not likely to be an acceptable answer to some other defined problem. Keynesian economics is a lot of things but it is largely associated with countercyclical fiscal policies, that is policies which act against the tide of the business cycle. It is associated with deficit spending when a nation's economy suffers from recession or when recovery is long-delayed and unemployment is persistently high. Keynes argued that governments should solve problems in the short run rather than wait for market forces to do it in the long run, because "in the long run, we are all dead." Austrian economics is also a lot of things. Mainstream economists often criticize it for not providing solutions to their problems. Even if this is true, it does not make their concept of the problem wrong. Many Austrian's describe the business cycle as a consequence of the problem, especially over long periods of time. Note that most everyone describes business cycles over longer time frames than fiscal years or election cycles. Policy questions for this year or for the coming election usually acknowledge only one or two legs of a business cycle. There are many Keynsians who focus on longer cycle questions but there seem to be few Austrians who focus on shorter cycle questions. And this Keynsian focus has come to be associated with economic engineering because of the focus on finding solutions. While many Austrian economists may consider economic engineering the height of arrogance, they have a coherent description of a significant problem. They say history shows that all credit bubbles end. Without exception. They also say that credit bubbles typically exhibit positive reinforcers. This means that growth leads to faster and faster growth. It is highly seductive. Credit growth in support of sound investments becomes equated with credit growth for malinvestments. Credit growth appears to be good for its own sake. That is until the growth stops. There is no objective level for too much credit. But hindsight is 20/20. The Austrians have indulged in a lot of hindsight. They are like Casandra saying this an unsustainable bubble without being able to say just exactly when it will burst. But burst, it will! Some argue that the current recession is so severe that we must have massive deficits. The human suffering must be addressed. They argue, in part, that our economy ran much higher deficits during World War II with obvious long-term economic benefits. The Austrian response would note that WWII came after the Great Depression in which credit was dramatically reduced. According to Federal Reserve data, the highest ratio to Total Credit to GDP occured around 1937 at 285%. During and after the war years, Federal debt and private sector debt were sufficiently restrained that the ratio remained modest by comparison. Today, the ratio of Total Credit to GDP is about 370%. The Austrians find that no nation has ever sustained this level of indebtedness. We also have a serious recession. Something has to give. The Austrian fear is that further deficits will be digging this hole deeper leading to an even greater calamity. Economists of every stripe would be well advised to better understand the Austrian perspective even if they choose to focus on the short-run human suffering. Condemning the Austrian perspective will ensure we take a bad situation and make it worse.
Toggle Commented Feb 6, 2010 on "Is Austrianism Serious?" at Economist's View
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We have all had some experience with debt so we think we understand it. It is clear from this thread that there is a lot of confusion. Let me start with some facts. To a bank or a financial institution, debt is an asset. They grow by increasing their debt assets. While fractional reserve banks have grown enormous, they are not the greatest source of debt increase. GSEs have $5 trillion in debt assets, the Federal Reserve estimates that the total US debt is $50 trillion, and there are estimates that financial derivatives total $200 trillion. Debt has a time dimension that is easily overlooked. A borrower may use future income to increase current consumption. Even if that future income does not materialize, the borrower may enjoy that current consumption. Financial brokers receive fees for creating / intermediating the debt. Investors grow by using borrowed funds to buy the debt. The financial market does not behave like the economic market. The price of apples may tend toward an equilibrium due to competing desires of buyers and sellers in the economic market place. In the financial market place, buyers buy more when prices increase and sellers are pleased when they get a higher price. The concept of equilibrium does not apply. There is no savings glut. There is a glut of debt! Real assets have not been created as fast as the debt was created but now it is hard to know who has a real claim on those assets because the real (economic) market has been obscured by the financial market. All those excess financial assets amounts to a house of cards that is only held up by the belief it matters. It is all so simply absurd.
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