"System change is now inevitable. Either because we do something about it, or because we will be hit by climate change. '...

"We need to develop economic models that are fit for purpose. The current economic frameworks, the ones that dominate our governments, these frameworks... the current economic frameworks, the neoclassical, the market frameworks, can deal with small changes. It can tell you the difference, if a sock company puts up the price of socks, what the demand for socks will be. It cannot tell you about the sorts of system level changes we are talking about here. We would not use an understanding of laminar flow in fluid dynamics to understand turbulent flow. So why is it we are using marginal economics, small incremental change economics, to understand system level changes?"

Tuesday, March 4, 2008

Krugman Advocates Excess

In some ways I'm an admirer of Paul Krugman. He somehow seems to manage to be a mainstream economist and a mensch at the same time.

On the other hand, there's this idea that economic health and growth are the same thing. See yesterday's column:
What we have now is a spending slump. It’s the consequence of easy credit that led to reckless spending in the past — but the problem now is how to sustain spending; trying to encourage austerity at this point will just make things even worse.
It's reassuring to see a few people in the comments saying "huh?" Perhaps I'm not the only person who finds this whole approach baffling. Exactly why are we trying to sustain the spending level that was reckless in the past? Perhaps I'm stupid and so I will never understand economics, but I always appreciate when somebody tries to explain it to me. It always seems to me, though, that they are going round in circles. "Growth is good because if you don't have growth you have a recession, which is bad because you don't have growth."

Update: I expanded on the above in comments to Krugman's blog. See entry #85. No reply as yet.


zencarver said...

Distance from a thing increases the discount rate applied to said thing. Whether the distance be spatial, temporal, or cultural (and there are probably other factors), it's how economics works. So it's all about the near term and treating the "symptom" (recession).

Michael Tobis said...

It strikes me that a recession is neither a disease nor a symptom of a disease but a symptom of a cure.

If the problem is excessive economic activity then what you want is for that rate to decline.

Anonymous said...

Michael, if you see a recession as a symptom of a cure tames too much consumer spending) you are looking down the wrong end of the telescope.

In this global economy wherein borrower and creditor nations enter symbiotic relationships that assure the cash is lent and repaid on time, a recession for America is not a cure of the disease, it is the treatment that makes the patient collapse and possibly never regain health and wellbeing.

US federal debt is approaching $10 trillion and US is heavily reliant upon China for cash. A drop in US purchase of China goods means layoffs in China factories and tightening of China monitory policy, including cutback of lending cash to a foundering US economy with its sinking dollar and creeping asset base deflation coupled with inflation of commodity prices. All of that in a global warming world waiting for the 111th Congress to assess some amount of penalty on CO2 emitters. Where the emitters find esay credit to retrofit their homes, cars, power plants and factories the lord only knows.

I seee todays global economy as six fat guys in a long canoe paddling across the flat water and hoping they are not heading towards rapids. If only one fat guy decides to get up and move about, the canoe capsizes and only the strong will survive the swim to shore.

I dread a recession coming at the very time there appears to be a US opportunity to legislate some kind of a CO2 mitigation law.

And, recall, there is about .5 degree C of temperature increase tucked away in the pipeline. Arctic sea ice meltback is coming back on stage and atmopsheric concentration is only 384 ppm. China will not stop building and burning coal and US will have to scrape along through a recession of our making. Silly monkies, us.

John L. McCormick

Michael Tobis said...

There is no doubt that in a growth-centric economy, recession is painful.

I don't see any way around this, though: the long term growth rate of anything, anything at all, is within epsilon of zero as T goes to infinity. That is, indefinite growth of a meaningful quantity is impossible.

What's more, if you agree that we have already overshot the sustainable level, an extended period of retreat is inevitable. It doesn't prove we will return to a healthy level. We could indeed collapse far beyond that. But the longer we put it off the worse the risks.

However it may inconvenience us as individuals, recessions are necessary in the large.

Anonymous said...

Michael, I am not certain your last post on this thread was a response to my comment. But, the points I am trying to make are related to how will the US find the cash and credit to comply with a global climate change mitigation law during a serious and likely long recession?

A downturn in US growth projection will not translate into any significant US CO2 emission reductions.

I have an idea the Lieberman Warner advocates are oblivious to what is just over the economic hroizon. The public will tell them to stuff it if the economy keeps geting worse. And AGW is such a time-related problem.

John L. McCormick

John L. McCormick

Michael Tobis said...

John, it was indeed intended as a response to you.

The question is whether marginal declines in the economy are disproportionately energy intensive or energy efficient. You seem to be making a strong claim to the latter. Why?

cieldumort said...

I read that Krugman piece when it came out. I'm not sure I read it the same way you do, however.

I agree with your posit that "developed" economies should focus on sustainability, rather than "growth." However, here we trip over words that can have several meanings.

For a generally developed economy to be sustainable.. it still has to "grow". So, Krugman is correct. We have to get the economy *growing* again... in order to sustain it.

Typically, a "developed" country still has increases in its population. It is this inevitable population *growth* that necessitates a continuously growing GDP, lest per capita wealth steadily declines.

So, while a developing country requires vastly higher rates of GDP to create wealth, a developed country still needs substantial gains in GDP to maintain wealth, especially in the face of global inflationary pressures, and its own population growth.

Michael Tobis said...

Ciel, eventually population has to stop growing as part of sustainability.

I don't think matching inflation is or should be considered "growth", but I wonder sometimes why money has to inflate at all.

cieldumort said...

Michael, you comedian you! lol

"eventually population has to stop growing as part of sustainability."

Just try forcing that on the people, however.

What we just need right now is another great plague. I don't want to die that way. I don't want anyone to die, at all. But, back in the day, mother nature kept things in equilibrium. Now we will probably have to wait for climate change and pollution to do mother nature's job for her - and at a far greater price to the rest of the living things on this world.

Yes, I have become one cynical bastard as I've grown older.

Michael Tobis said...

People can be influenced. The right social and economic incentives need to be put in place. That's the purpose of society.

Unfortunately as someone said we have replaced our society with an economy. Well, it's increasingly apparent that won't last.