The roots of the American Federal Reserve and the Progressive era:Useful history to guide us in the current crisis

Posted on September 4, 2011 by haroldchorneyeconomist

Among the few 1000 books in my library is a blue covered paperback with a green and black business cycle imposed on it with a photo of President Woodrow Wilson in the last peak to trough. I bought this book back in my undergraduate days in the mid 1960s. It is by Arthur Link who taught at Northwestern University. It is entitled Woodrow Wilson and the Progressive Era 1910-1917. I bought it on sale and the nicely stitched and bound  paperback published in 1963 by Harper Torchbooks cost me less than the list price of $1.95. It is well worth reading today because of the story it tells about the creation of the Federal Reserve in 1913 and the ferocious politics that accompanied its birth.

In many ways Americans are reliving these events today. The divisions within the Republican party and in the Congress over what ought to be the appropriate role for the Federal Reserve in response to the crisis, the populist claims of the tea party movement and the appearance of populist styled radical Republicans like Ron Paul and Sarah Palin, as well as the pragmatic but cautiously moderate approach of Barack Obama all have earlier echoes in that epoch.

In those days radical populists like William Jennings Bryan, former President Teddy Roosevelt who ran on a third party Bull Moose platform in the 1912 presidential election and the candidate of moderate progressivism,  Woodrow Wilson who ran as a reforming Democrat on a New Freedom slogan which argued that economic democracy was ”absolutely essential to political democracy” dominated the political scene. The incumbent President William Howard Taft, the official Republican candidate finished third with 3.5 million votes compared to Roosevelt’s 4.1 million, Wilson’s 6.3 million and the Socialist party candidate Eugene V. Debs 901.9 thousand votes. Wilson won 435 electoral college votes, Roosevelt 88 and Taft 8. Wilson also captured control of the House of Representatives with a majority of 73 and the Senate with a majority of 6. (pp.22-23, Link)

The 1912 election was influenced by the economic crash and financial panic of 1907 which had required the intervention of J.Pierpont Morgan to save the day.

Hence the push for the creation of the Federal Reserve. The Carter Glass- Robert Owen act which established the Federal Reserve was passed into law on December 23, 1913 (p.52,Link)and it was one of the greatest achievements of the first term of the  Wilson presidency. Its critics , from the populist left, principally the radicals around Bryan in the Democratic party and beyond were angry that the original draft of the bill did not go far enough in curbing the powers of the big banks and trusts in dominating the financial markets and exercising excessive influence over the regional central banks and separating the power to create currency from the supply of commercial paper. The southern agrarian reformers also complained there were no special provisions made for agricultural credit and that the farmers were sold out to the moneylenders.This was then partly remedied by an amendment that authorised the discounting of agricultural paper. This accomplished Bryan supported the bill.(pp.49-50 Link)

On the other side bankers, business leaders and their allies in congress denounced the Federal Reserve  bill as ”socialistic, theoretical, vicious” and  ”the preposterous offspring of ignorance and unreason”( Link, p.50) Despite the vitriol Wilson stood his ground and the bill became law.

In that era Teddy Roosevelt played a major progressive role in converting many of his populist supporters from a rather right wing Jeffersonian populist laissez-faire orientation to one that focused on federal power and regulation exercised to promote social justice and regulation of the trusts and established interests in the interest of all. In this role Roosevelt adopted the approach of a New York journalist Herbert Croly who in 1909 had published his progressive political treatise  Promise of American life wherein he compared the two dominant traditions in American politics, Hamiltonian democracy which emphasized a strong federal government role in managing and regulating the economy as compared with Jeffersonian democracy which emphasized decentralization and laissez-faire. Croly argued that progressives needed to abandon their opposition to a strong federal role which he admitted had been abused in the past to privilege the powerful financial and industrial interests, but now could be reoriented by using ”Hamiltonian means to achieve Jeffersonian or democratic ends.”(pp.18-19 Link)

President Obama, progressive Democrats and Independents and Republicans might well find  helpful inspiration in these circumstances 100 years later.

Posted in Federal Reserve, progressives, U.S., unemployment | Leave a comment

The Long ”Recession” Deepens:American job creation at a standstill

Posted on September 3, 2011 by haroldchorneyeconomist

The alarm bells should be ringing at the White House and in the halls of Congress at the latest economic numbers in the painful prolonged battle to restore prosperity to America. We are now a full two years since the economic growth numbers turned positive and the apparent first leg of the great slump bottomed out in the summer of 2009. For the fourth consecutive month job creation has been very disappointing and so small as to have no positive effect on lowering the very high unemployment rate. This past month partly because of continued layoffs in the public sector at both the federal and state and local level and because of an on-going labour dispute in the private sector there were exactly zero  net additions to the labour force. Well over 250,000 net new hires are needed each month to bring down the unemployment rate but the economy with respect to new hiring is moving in exactly the opposite direction. The time for action is now.

President Obama is apparently about to propose a package of tax and spending measures which need to focus on direct job creation and reinvestment in infrastructure,the environment, storm reconstruction, aid to states and local authorities, education and income support for the unemployed, perhaps additional mortgage relief as well as special tax incentives for business to hire new employees. These ought to be substantial programs in the many 100s of billions of dollars. The Republicans and Democrats should put aside their partisan objections for another day and recognize the urgency of the situation. The lower the unemployment rate the smaller will be the deficit in the medium term and the easier it will be to address structural imbalances in the long term.

it is also time for the private sector to step up to the plate and unlock their amply filled treasuries and start hiring.  When they were in danger because of the crash the American government and taxpayer came to their rescue. It is time to repay the debt.

Posted in austerity, business cycles, deficits and debt, fiscal policy, J.M.Keynes, U.S., unemployment | Leave a comment

The misguided recrudescence of classical economic orthodoxy and the ” Treasury view “

Posted on August 31, 2011 by haroldchorneyeconomist

Much is being made of the supposed benefits of medium term deficit reduction through austerity as a reassurance to the private sector to enable them to feel confident enough to spend their several trillion dollar hoard on investing and creating jobs. The problem with this sort of thinking is that it involves a reassertion of a previously discredited doctrine from the 1920s and 1930s called Say’s law and the Treasury view which was central to classical economic orthodoxy during this period.  The British economist John Fender in his very useful book Understanding Keynes:An Analysis of the General Theory put the case rather well back in 1981.

Keynes’s ”concern was with characterizing the theoretical framework underlying their( the classical school) thought. The theory …does generate many of the ideas which one associates with the classical school. For example, if the government increase its spending ,this will lead either to a fall in private sector investment or in consumption or in both, and if consumption spending is interest inelastic there will be 100% crowding-out of the private sector investment- the so called ‘Treasury View’ .( John Fender, Understanding Keynes:An Analysis of the General Theory ,Brighton: Wheatsheaf  books, 1981; p.7)

This is clearly a false doctrine that was discredited in the 1930s but it has once again resurfaced with many Republicans and other fiscal conservatives who are Democrats. There is absolutely no evidence to support this view and in purely logical as opposed to ideological terms it makes no sense. During a crisis and the recession and slow growth period which follows any increased investment or spending benefits aggregate demand which is the key to restoring purchasing power among consumers in order that they will buy what the system is capable of producing. The reason that private sector hoards of cash are not being invested in job creating production has a lot to do with their judgement that consumer demand for the purchase of their output is too weak to justify their expenditure. For ideological reasons some business leaders will complain about government spending and deficits.

They always have and  they always will.

But if a boom in consumption occurs and shows up in the demand for their products they will invest and hire . Otherwise, they are giving up profits they could make. It is because of weakened consumer demand and pessimistic expectations and not government spending or deficits that firms do not spend their cash hoards.

(see also Brad Delong’s blog where he disputes David Harvey’s anti deficit argument.    http://delong.typepad.com/sdj/2009/02/defenders-of-the-treasury-view-part-cxiv-david-harvey-speaks-and-claims-to-know-more-about-keynesian-economics-than-joan.html )

Posted in austerity, business cycles, classical economics, deficits and debt, fiscal policy, J.M.Keynes, treasury view, Uncategorized, unemployment | Tagged | Leave a comment

Poli 363 Fall, 2011

Posted on August 29, 2011 by haroldchorneyeconomist

Poli 363 fall 2011

Poli 363 Fall 2011 . Course outline
Canadian Public Policy :Eight Policy Problems
Professor Harold Chorney
“In the event of extraordinary circumstances beyond the University’s
control, the content and/or evaluation scheme in this course is subject
to change”.
e mail chorney@alcor.concordia.ca
Office hours tba.
Course synopsis: This course introduces students to the analysis of selected contemporary public policy problems. We select eight policy issues and examine them intensively over the next 13 weeks. The course is research oriented and requires students to spend time seeking material on the internet and in the library as well as reading extensively in each of the areas from the list of works provided.
There is no formal text that covers all of these areas. However, several works including a collection of readings on the problems of  deficits and debt and public finance and 2 texts on introducing micro and macroeconomic analysis are assigned as texts.In addition students are expected to read a number of blog posts and internet posted articles.
Despite the large class size we will endeavour to have informed discussion and debate in each class. This, however, obliges students to do their work outside of class in order to insure that discussion and debate is well informed and based on research rather than uninformed opinion.
The world of public policy has shifted dramatically during the past few years. The collapse in the stock and financial markets in 2007 and 2008 and early 2009; the pricking of the real estate bubble; the crisis in asset backed commercial paper;the implosion in derivatives; the spate of corporate scandals, fraud and corruption; the sub -prime mortgage collapse in the U.S. and its impact upon the banking system in the U.S.and Great Britain; the general global financial paralysis that followed this collapse; the terrible events of September 11th ,2001; the wars in Iraq and Afghanistan,the revolt for democracy in the Arab world, the tragedy of hurricane Katrina on the Gulf Coast, the recent oil spill in the Gulf, the earthquakes in Haiti, Japan and Chile, the collapse of infrastructure in Montreal and Minneapolis, the riots in Britain,the spectre of global warming, the health care debates in the U.S. and Canada have dramatically shifted public opinion in both Canada and the United States and to some extent globally as well.
What was once seen as impossible or passé in terms of government intervention in the economy has now once again been placed at the top of the agenda. Re-regulation, intervention,investment in infrastructure and long term planning and environmentalism as opposed to laissez-faire and growth at all costs and even budget deficits as deliberate policy are back on the agenda. After thirty plus years in the shadows, Keynesian policy is once again somewhat fashionable and even celebrated despite being contested.
Corporate executives from finance, manufacturing and transportation, originally participated in the call for intervention, stimulus, bailout and reregulation.The once much vaunted theory of perfectly rational markets and laissez-faire is now once again passé. In recent months there has been an attempt led by right wing Republicans in the U.S. and Conservative politicians in the U.K and Germany to reassert sound finance principles, backed by the revenge  of the bond market and argue that Keynesian stimulus has failed.
But the evidence is not convincing. The U.S. non partisan bureau of the budget has recently reported that the American stimulus was effective in both lowering the unemployment rate and promoting growth and economic recovery.The problem has been that the stimulus was on the small side and undermined by cuts at the state and local level. More is needed if results are to improve. But politically this will be difficult to accomplish.
Keynesian New Deal style policy proposals for reinvestment in infrastructure and fiscal stimulus were advocated by leading American figures like Larry Summers, the former US secretary of the Treasury and former president of Harvard university and initially President Obama’s principal economic advisor, Robert Reich, the former US Labour secretary, Mayor Michael Bloomberg of New York, Governor Ed Rendell of Pennsylvania and even then Republican Governor Arnold Schwartzenegger of California as well as Nobel prize winning economists like Joseph Stiglitz and Paul Krugman.
 President Barack Obama has implemented a 787 U.S. billion dollar Keynesian stimulus which is designed to reverse much of the damage of the deep recession that followed the financial collapse.A second phase is now clearly necessary but the Congress  seems poised to reject any such plan.The Republicans seem rejeuvenated by the radical right wing tea party movement and the fact that they  have captured majority control of  the House of Representatives .
In Canada the clash of political opponents seems less dramatic since the Harper government rather pragmatically endorsed a small but significant stimulus package and the Liberals under the pressure of events abandoned, perhaps only temporarily, their previous hostility to deficit finance. The election dramatically shifted the status of all the parties.
We have now a Harper majority conservative government opposed by a surging NDP who have replaced the Liberals as the official opposition. The tragic death of their leader Jack Layton is an enormous loss, nevertheless for the next 4 years they will lead the opposition in Parliament to the Conservative agenda.The immediate problem in Canada is the fact that this past quarter economic growth in the GDP turned negative because of declining exports. This will feed back into employment and will require more supportive monetary and fiscal policy to avoid a double dip recession.
The re-election of the Bush Republicans to a second term had significant implications for Canada.The crisis in management of the natural disaster following the tragedy of Hurricane Katrina raised some interesting questions about the balance of political forces in the US. The quagmire in Iraq greatly increased dissatisfaction with the Bush Republicans .
The race for the Presidency between Democratic candidate Barack Obama and Republican John McCain turned into not just a major debate about Iraq but also the future direction of the American economy and the role of fiscal and monetary policy. The somewhat Keynesian inclined Barack Obama and the Democrats won the election decisively and policy  shifted accordingly.The American Congress at the behest of President Bush had enacted a significant stimulus package which had resulted in a modest Keynes style deficit of about 3 % of the GDP.The Obama stimulus was much larger, understandable in the light of the collapse of the housing market and the crash of derivative products and amounted to over 6 % of the GDP.
In this respect because of different circumstances the extreme fiscal conservative orthodoxy of Canada’s political parties is now overshadowed by the rediscovery of Keynesian technique in the USA. The refusal to think about the wisdom of stimulus facilitated by deficit spending in Canada now looks and is outdated and anachronistic.
Under the pressure of the changed circumstances the Canadian Harper government finally moved to introduce and have passed a very modest 40 billion dollar stimulus to deal with the recession in Canada.It now no longer calls for an immediate balanced budget or the old now untimely call for balanced budgets ”come hell or high water” that Paul Martin and the Liberals articulated in the early 1990s. This was a major shift in policy even if now the focus has once again returned to cautious austerity.However, the  Toronto G20 meeting reasserted the  misguided claim of conservative central bankers like Jean Claude Trichet of the European Central bank that the stimulus moment had now passed and fiscal tightening was now preferred.The U.S. debt ceiling crisis  further complicated the policy scene and shifted sentiment dramatically in a pessimistic direction.
However this shift is premature and if the global economy continues to slow in response to this shift I expect that Keynesian approaches will be once again be on top of the agenda.As of this late summer 2011 there is already some evidence of this being the case in the slowdown in Canadian and U.S. growth and the European debt crisis.
The energy crisis which saw oil prices rise to close to $150 a barrel from below $30 just two years before has had an enormous impact upon public opinion in both countries.They then fell to the 70 dollar range.Currently (Aug 23, 2011) they have reached $85 for NYMEX oil. This spike in prices contributed to the recession. Since Canada is a net oil exporter and very rich in energy supplies, particularly in Alberta and its oil sands, while the US is a major net importer of oil the economic impact has been quite different in both countries. The issue of the cartel that controls oil prices and its impact upon employment, growth and inflation as well as environmental considerations will continue to be a hot issue in both Canada and the U.S.
Canada must now reassess its historic relationship to the
United States in the light of the on going security needs of both the United States and Canada and our increasing economic dependence upon American export markets in an era where globalization and outsourcing pose important challenges to our prosperity.The frustration of Canadian policy makers and public opinion over soft-wood lumber exports and cross border traffic may lead to a rethink about the terms of free trade with the US. The Democratic party’s apparent preference for a more protectionist trade stance will be an important factor in the years to come.

We explore a number of themes that lead logically out from this new environment in the new global economy of 2011. My goal is to help the student become a skillful policy analyst and an independent thinker about policy issues.

Texts 

Harold Chorney, The Deficit Papers,Montreal: 2010 ed..(available through me)

Joseph Stiglitz, Free Fall:America,Free Markets, and the Sinking of the World Economy

Hassan Bougrine, Ian Parker and Mario Seccareccia eds. Introducing Microeconomic Analysis

Mario Seccareccia and Hassan Bougrine, Introducing Macroeconomic Analysis

Caroline Lucas and Michael Woodlin , Green Alternatives to Globalization

Stephen Clarkson, Does North America Exist ? Transborder Governance under Globalization and the War on Terror

Basic background readings:

Harold Chorney, Revisiting Deficit hysteria in Labour/Le travail fall 2004.pp.245-258.(available on internet) (assigned reading)

The Finance Crisis and Rescue, The Rotman School of Management, 2008 (recommended)

Stephen Clarkson, Uncle Sam and US (recommended)

Ha-Joon Chang, Bad Samaritans :The Myth of Free Trade and the Secret History of Capitalism (recommended reading)

Joseph Stiglitz, Making Globalization Work (recommended)

Kevin Phillips, Bad Money:Reckless Finance, Failed Politics and the Global Crisis of American Capitalism Viking 2008 (strongly recommended reading)

Simon Johnson and James Kwak, 13 bankers:The Wall Street Takeover and the Next Financial Meltdown, N.Y. : Vintage, 2011.(strongly recommended)

Michael Lewis, The Big Short:Inside the Doomsday Machine, N.Y. : W.W.Norton, 2010.(recommended)

John Kenneth Galbraith, The Economics of Innocent Fraud(recommended reading)

Samuel P. Huntington, The Clash of civilizations and the Remaking of the World Order, Simon and Schuster, 1997.(recommended rerading)

Daniel Drache, Borders Matter: Homeland Security and the Search for North America(recommended reading)

John Dean , Conservatives without Conscience (recommended reading)

George Soros, The New Paradigm for Financial Markets :The Credit Crisis of 2008 and What it Means(Public Affairs)

Thomas Kean& Lee Hamilton et al, The 9/11 Report The National Commisssion on Terrorist Attacks Upon the United States (recommended reading)

Tim Lewis, In the Long Run We’re All Dead: The Canadian Turn to Fiscal Restraint. (recommended reading)

Joseph Stiglitz, Globalization and its Discontents, 2001.( recommended )

Joseph Stiglitz : The Roaring Nineties: A New Twist on the World’s Most Prosperous Decade( recommended reading)

Harold Chorney, The Economic Benefits of Linguistic Duality in Albert Breton, The Economics of Bilingualism, Ottawa:Canadian Heritage, 1998.(recommended reading also may be available on the internet)

Harold Chorney and Philip Hansen, Toward a Humanist Political Economy, Black Rose, Montreal, 1992. .(recomended reading)

Bai Gao, Japan’s Economic Dilemma:The institutional origins of prosperity and stagnation, Cambridge university Press, 2001.

Phillipe Legrain, Open World The Truth about Globalization, 2002, Abacus Books

Noam Chomsky, 9/11, NY: Open media Book, Seven Stories press,: 2001.(recommended reading)

Lewis Lapham, Gag Rule: On the Supression of Dissent and the Stifling of Democracy (recommended reading)

Doris Sommer, Bilingual Aesthetics (recommended)

George Grant, Lament for a Nation.

Lloyd Axworthy, Navigating a New World:Canada’s Global Future

The Honourable Michael Kirby &the Honourable Margorie Lebreton co chair, The Health of Canadians: The Federal Role, Final Report on the state of the Health Care System in Canada, Vol Six:Recommendations for Reform, (assigned reading)

Jagdish Bhagwati, A Stream of Windows:Unsettling Reflections on Trade, Immigration and Democracy

Jim Stanford,Paper Boom, CCPA, 1999.

Lars Osburg &Pierre Fortin, Unnecessary Debts, Toronto, Lorimer, 1996.

Andrew Jackson,et al, Falling Behind:The State of Working Canada, 2000

Bob Rae, The Three Questions:Prosperity and the Public Good, Toronto Penguin, 1998.

Daniel Drache & Terry Sullivan,eds. Health Reform: Public Success/Private Failure NY: Routledge, 1999

Michael Rachlis & Carol Kushner, Strong Medicine,Toronto:Harper Collins, 1994.(recommended)

Linda McQuaig, The Cult of Impotence:Selling the Myth of Powerlessness in the Global Economy, Viking 1998.

Linda McQuaig, Shooting the Hippo, Viking, 1995.(recommended reading)

Thomas Palley, Plenty of Nothing, The downsizing of the American Dream and the Case for Structural Keynesianism, Princeton University Press, 1998.

Colleen Fuller, Caring For Profit:How Corporations are Taking Over Canada’s Health Care System (strongly recommended reading)

Stephen McBride and John Shields, Dismantling a Nation:The transition to Corporate Rule in Canada.Halifax, Fernwood, 1997.

Jeremy Rifkin, The Age of Access, Tarcher, Putnam Penguin, New York, 2000.
The Empathetic civilization: the race to global Consciousness in a world of crisis.N.Y.:Tarcher Putnam Penguin, 2009

John Grieve Smith, There is a Better Way: A New Economic Agenda, London:Anthem Pres, 2001.

Paul Omerod, Butterfly Economics, NY: Pantheon Books, 2000.

Daniel Lazare, What’s Killing Our Cities and How We Can Stop It, New York:Harcourt, 2001

Edmund P.Fowler & David Siegel, Urban Policy Issues :Canadian Perspectives, Toronto:Oxford University Press.,2002.

Andrew Sancton, Merger Mania: The Assault on Local Government, Montreal: 2000.(recommended)

Harold Chorney, Review of Andrew Sancton’s book Merger Mania in Canadian Journal of Regional Science, vol.23 #1, 2001, pp.175-178.(recommended)

Alan Broadbent Urban Nation:Why we need to give power back to the cities to make Canada strong, Harper Collins,2008.

Harold Chorney , City of Dreams: Social Theory and the Urban Experience, Nelson, 1990

Mark Kingwell, Concrete Reveries:Consciousness and the City, Viking, 2008

Key Web sites:
http://www.cec.org, web site of the North American Commission for Environmental Co-operation.

www. ville.Montreal.qc.Ca, web site of the city of Montreal

IMF; OECD; Eurostat; U.S.Treasury; U.S. Bureau of Labour statistics; Statistics Canada.

GRADE:
The grade will be based on a final exam 50 % and a mid term test in the first week of November  or an essay due in the first week of November  50 %.

TOPICS:
1. Introduction and overview. How does public policy analysis work? The role of interdisciplinarity. Research techniques. Policy and values.Policy and the political process. Globalization and trade. Business cycles and public finance. The long recession.

Policy after the market crash, the credit crisis and the post 9/11 world.
Readings: 9/11 report; Drache.The Rotman school; Phillips, Soros, Chorney blog items on credit crisis, manias panics and bailouts, and the Keynesian revival,Ha-Joon Chang, Stiglitz.Clarkson.

2. The Return of Keynesian economics in public policy.Obama, Bush, McCain,the Tea party Republicans, Clinton (Hillary and Bill) and the revival of Keynes in the US. Canadian fiscal conservatism . Public finance.The debate about deficits,surpluses, debt and employment. The return of regulation after Enron, Madoff, the crash on Wall street, the banking crisis, the dot com bubble bursting and the credit crisis and sub-prime housing market. The current dilemma,mass unemployment and the possibility of a double dip recession.

Readings: Galbraith; Chorney on revisiting deficit hysteria; on deficits; Tim Lewis , Chorney blog items on revival of Keynes and the financial crisis.Chorney papers from the Eastern Economics association and the Canadian economics association on Keynes and the general theory and on Rediscovering Keynes and the origins of quantitative easing and the crisis. (See this blog, June 3rd, 2011 )Chorney on the role of public enterprise and regulation in The deficit papers. Chorney U tube items on Keynesianism, financial crisis and deficits and debt.

3. The Challenge of Protecting our Health care system. The Canadian, British and American models. Federal provincial disputes over health care. The Romanow Commission. Alberta versus the Federal Government. Market versus public approaches. The American health care debate. The question of affordability.

Readings:Colleen Fuller, Romanow and Kirby Reports available on the internet;Drache and Sullivan; Rachlis and Kushner.Canadian Health Information data base.Clarkson.The New York Times and the Wall Street journal, Huffington post and Salon magazine.

4. The rise and fall of the mega-city of Montreal. The background, the debate, the election and the demerger referenda.The state of politics at city hall.The Mayor and Council.Scandal at city hall.  Infrastructure collapse.Budgetary questions.The problem of homelessness. A federal role in cities ? The challenge for local democracy and economic development.
.Readings: Sancton; Aubin; Broadbent;Chorney , Mark Kingwell.

5. Managing the global economy.Corporate behaviour. The problem of capital flows. The Argentine debt crisis.Latin American contagion. The need for new financial architecture. The Tobin tax, debt repayment standstills and reworking exchange rates. Market disorder versus regulated management. Turbulence in Venezuela. Canada and Latin America.Venezuela& oil.The Brazilian third way.The policy stance of the new Japanese government with respect to globalization. The European debt crisis and the European Central Bank.
Readings: Galbraith; Stiglitz;internet on Argentina and debt crisis and Venezuela.Clarkson on Nafta; Bai Gao on Japan, Chorney blog.

6. Environmental challenges. NAFTA and managing the environment.The tension between economic growth and the environment.The Kyoto accord. Globalization and Green Politics ? Hurricane Katrina and civil preparedness.Dion’s Green shift.
Readings: Clarkson; Drache; Bhagwati; internet, Lucas and Woodlin Green manifesto

7. Bilingualism: A Canadian defining characteristic.The” Spanish challenge ” in the United States.
Readings: Chorney in Albert Breton; Huntington on the Hispanic Challenge; Sommer on Bilingual Aesthetics.

8.. Canada in a global world; Canadian foreign policy in the era of NAFTA and 9/11. Our security. Our relationship with the United States. The Axworthy legacy. From Axworthy to Manly to Graham to Pettigrew. The missile defense controversy. A new way forward ? The clash of civilizations ? Chomsky versus Huntington.
Readings: Drache;9/11 report;Chomsky ;Huntington; Axworthy.

9. The energy crunch. Alberta and the problem of fiscal federalism. Sharing the wealth of regional resources. Canadian oil and American needs, a strategic partnership. The future of free trade.
Readings:Clarkson; tba.

Weekly assignments: September: Read the Revisiting deficit hysteria (internet) and Manias panics and bailouts essays. The first is on the net the second is in my older blog Jan.2009 Begin reading Clarkson and Stiglitz.

Readings Sept 30 The deficit papers chapters; start with ch. on Keynes, the new introduction to collection, and deficit hysteria.

Essay assignment: Due the first week of November Thursday class .

Write an essay of 12-15 pages on one of the following topics drawn from the course . Be sure to use a manual of style and properly cite sources and providea bibliography. You should use books, periodical literature and internet sources that are properly noted.

Topics :

1. Discuss the debate over deficits, surpluses and debts. evaluate the Obama stimulus as compared to the Harper one .

2. Explain the origins of the recent financial crash. What role did deregulation and laissez-faire play in this crash. What has been the experience of financial panics and crashes in history.

3. Compare Keynes’ theory of unemployment and anti-recession policy with that of the monetarists.

4. Explore the problem of inflation in a capitalist economy. Can moderate inflation be compatible with real economic growth and low unemployment.

5. What led to the eclipse of Keynes from 1974 to 2008.

6. Explore the oil industry and the global pricing system for oil.

7. What is the history of Canadian health care. How does the Canadian system compare to the American debate over health care.

8. Explore the origins of neo-conservatism. How was it able to have such a lasting large impact upon western societies.

9. Discuss the debt crisis and dollar currency boards in Latin America and their impact upon Argentina.

10.Compare and contrast the argument of Noam Chomsky with respect to American power as opposed to the work of Samuel Huntington.

11. Examine the history and evolution of the debate over global warming and Canada’s policy stance toward this critical issue.

12. What has been the Canadian foreign policy orientation. what should it be.

13.Examine the state of free trade between Canada, the U.S. and Mexico.Explore the evolution of the doctrine, its consequences for Canada and its likely future evolution.

14. Explore the roots of the Tea Party in the U.S. How do they compare to Canadian neo-conservatives ?

Posted in austerity, business cycles, Canada, deficits and debt, fiscal policy, free trade and globalization, Health care, J.M.Keynes, Japanese unemployment, U.S., unemployment | Leave a comment

Poli 610 Fall term 2011

Posted on August 25, 2011 by haroldchorneyeconomist

Poli 610 2011 fall term



Pol. 610  Macro-economic policy-making after Keynes

Concordia University

fall, 2011
Prof. H. Chorney tel. 848 2424 ext.2106 
e mail Chorney@alcor.concordia.ca
Office hours tba
This course is an intensive examination of macro-economic policy-making and macro-economic theory in the light of recent global developments, including the crisis and fraud in global financial markets, the sub prime mortgage market crisis, the accompanying collapse in asset backed commercial paper and the Keynesian backed recovery now underway, the possibility of a double dip recession and the recrudescence of monetarism, deficit hysteria and laissez-faire in certain circles.  It examines in close detail the problems of inflation,deflation,public finance, unemployment, recession,depression, stagflation and economic growth in the light of the work of John Maynard Keynes and his interpreters, co-creators and supporters like Michal Kalecki , Joan Robinson, R.F.Kahn, J.K.Galbraith, Abba Lerner, Hyman Minsky, Robert Eisner, Paul Davidson on the one hand and Friedrich Von Hayek, Milton Friedman, Harry Johnson, David Laidler, Robert Lucas and their followers on the other hand, as well as the neo-classical synthesis that draws from both schools.
In addition, we shall examine certain aspects of the contemporary political economy and explore the bursting bubble in high technology in 2000 and the recent collapse of the financial markets, as well as aspects of globalization and their impact upon growth theory and macroeconomics, as well as the impact of 9/11, the New Orleans catastrophe,the election of Barack Obama and the credit crisis, the recent revenge of the bond markets  on shifting attitudes in public opinion and policy towards Keynesian intervention and planning and away from strict laissez-faire. From 2008 a modest New Deal style Keynesian
intervention introduced by the new Obama administration including substantial investment in infrastructure and reregulation of the banking, financial, energy and transportation sectors has stabilized the slump that followed the financial crash . Growth has now resumed although it is not yet robust.  Some doubts still remain among skeptics  that the recession is over and a double dip can be avoided. Nevertheless there is considerable evidence that Keynes is back and that his theories once brought up to date by innovations like quantitative easing or temporarily monetizing some of the debt(an innovation that I first proposed in detail a number of scholarly articles and monographs in the early 1980s and nineties, but whose roots lie in the work of John Maynard Keynes and his circle in the early 1930s -see  my papers on Keynes and the origins of quantitative easing and on the 75th anniversary of the General Theory posted  on this site in June) are sound and are very effective in fighting recessions and reversing slumps. The dogma of the past twenty-five years that unregulated markets work best and are always rational is now partly eclipsed by both events and public opinion. The previous Canadian political party consensus on balanced budgets and fiscal prudence is now anachronistic in the light of events in the global economy.
The course includes an intensive examination of the economic, political and social thought of Keynes, the relationship between Keynes and Bloomsbury, the way in which his ideas were received, interpreted and applied and the revolution and then counterrevolution in thinking which his work provoked. The clash between Keynesianism and monetarism is explored in detail. An attempt is made to present the rudiments of an alternative theory of macro-economic performance that is more consistent with contemporary reality and incorporates insights from both schools. Presentation is through lectures and seminars. Extensive reading is expected of all students.
The severe recessions of
the early 1980s and 1990s and the growing fear of deflation in the first years of the 21st century and the current shocks to global financial markets and national economies serve as the contemporary backdrop for the course. The controversies over the public sector debt and deficit,the use of surpluses, the neglect of infrastructure, full employment and the role of the state in modern capitalist society are thoroughly explored.
Texts and Basic readings ( Text *)
 John Maynard Keynes, The General Theory of Employment, Interest
and Money *
Hassan Bougrine and Mario
Seccareccia  eds. Introducing macroeconomic analysis, Edmund Montgomery publications ltd. Toronto *
Richard Parker, John Kenneth Galbraith: his life, his economics , his politics.*
Athol Fitzgibbons, Keynes Vision * (several copies will be circulated among students )
Joseph Stiglitz, Freefall:Free Markets and the Sinking of the
Global Economy *, N.Y. : W.W.Norton, 2010
Peter Clarke, Keynes:the Rise, Fall, and Return of the 20th Century’s Most Influential Economist, N.Y.Berlin&London:Bloomsbury Press, 2009.  *
David Wessel, In Fed We
Trust: Ben Bernanke’s War on the Great Panic, How the Federal Reserve Became the Fourth Branch of Government, New York:Random House, Crown Business, 2009.
 Thomas Kuhn, The Structure of Scientific Revolutions
(recommended )
Harold Chorney, The
deficit papers *(available through me)
Haroldchorneypoliticaleconomist blog available on the internet
Haroldchorneyeconomist.com current blog on internet
 Kevin Phillips, Bad
Money: Reckless Finance, Failed politics, and the Global Crisis of American Capitalism (Viking, 2008)
The Rotman School of
Management, The Finance Crisis and Rescue:what went wrong?why? what lessons can be learned? U of Toronto Press, 2008
  John Maynard Keynes, Essays in Persuasion (Reserve)
The
Economic Consequences of the Peace A Treatise of Money, Vol 1 & vol 2(Reserve)
Henry M. Paulson, Jr.On the brink: Inside the Race to Stop the
Collapse of the Global Financial System, N.Y. Grand central publishing, Hachette, 2010
Charles Kindleberger, Manias,Panics and Crashes:A History of Financial Crises,London:Macmillan,1978
Scott Patterson, The Quants:How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, New York Crown business,2010.
Michael Lewis, The Big Short: Inside the Doomsday Machine, N.Y. :Norton, 2010.
Justin Fox, The myth of the rational market,A history of risk, reward and delusion on Wall  Street,N.Y. Harper, 2011.
Simon Johnson and James Kwak, 13 bankers: The Wall Street Takeover and the Next Financial Meltdown, New York :Vintage, 2011.
Gordon Brown, Beyond the crash:Overcoming the First Crisis
of Globalization, N.Y.,London, Toronto &Sidney, Free Press
 The General Theory and After: Preparation Vol.13,C.W. (R)       The General Theory and After: Defense and Development Vol.14 C.W.
(R)
The General Theory and After: A Supplement Vol.29 ( R )
Robert Skidelsky, John Maynard Keynes, Vols 1 & 2 &3 (R )
Donald Moggridge, Maynard Keynes: An Economist’s Biography (R )
Harold Chorney, Revisiting Deficit Hysteria in Labour/Le Travail Fall 2004 No.54, pp.245-258. * (available on internet) *
Harold Chorney, The Deficit and Debt Management: An Alternative to Monetarism * (Reserve)
Harold Chorney, After the Crash:Rediscovering Keynes and the Origins of Quantitative Easing paper presented to the Eastern Economics Association, New York,Feb. 27, 2011. (posted on this site June 3, 2011) *
Harold Chorney, John Maynard Keynes and the General Theory after 75 Years:Preface to a Presentation to the Canadian Economics Association Special Panel on” Reconsidering Keynes in a Time of Crisis” * (posted on this siteJune 3, 2011)
A.Fitzgibbons, Keynes’ Vision * (Reserve)
Brian Snowdon & Howard Vane eds. A Macroeconomics Reader (Reserve)
Timothy Lewis, In the long run We Are All Dead: The Canadian Turn to Fiscal Restraint 
 Joseph Stiglitz, Making Globalization Work (Reserve)
Joseph Stiglitz, Globalization and its Discontents(Reserve)
 Joseph Stiglitz, The Roaring Nineties(Reserve)
William D. Cohan, Money and Power:How Goldman Sachs Came to Rule the World
 Dean Baker, Gerald Epstein and Robert Pollin, Globalization and Progressive Economic Policy (Reserve)
Doug Henwood, Wall Street (Reserve)
 L.Randall Wray, Understanding Modern Money:The Key to Full Employment and Price Stability (Reserve)
James Macdonald, A free nation Deep in Debt (Reserve)
J.C.Gilbert, Keynes’s Impact on Monetary Economics
  Harry G.Johnson, Macroeconomic theory and monetary policy,
Chicago: Aldine publishing, 1972.
Axel Leijonhufvud,On Keynesian Economics and the Economics of
Keynes,London: Oxford University press, 1968.
Gilles Dostaler, Keynes et ses combats, Paris:Albin Michel, 2005. (Also available in a new English language edition)
G.Boismenu &G.Dostaler, eds. La Theorie générale et le keyésianisme, Montreal:ACFAS, 1987.
Other Key Works:
Hyman Minsky, John Maynard Keynes (N.Y.:McGraw Hill, 2008);                        Stabilizing an Unstable Economy(N.Y.:McGraw Hill, 2008);   Can it Happen again:Essays on Instability and Finance (Armonk, N.Y.: M.E.Sharpe, 1982);  R.Dimand, The Origins of the Keynesian Revolution;  Charles Hessian, John Maynard Keynes: A Personal Biography of the Man Who Revolutionized Capitalism and the Way We Live;  Roy Harrod,John Maynard Keynes;  A. Hansen, A Guide to Keynes;  Fausto Vicarelli, Keynes:The Instability of Capitalism;  Paul Davidson,Post Keynesian Macroeconomic Theory;  R.Allen & G.Rosenbluth,False Promises: The Failure Of Conservative Economics;  Lars Osberg & Pierre Fortin, Unnecessary Debts;  D.Drache & R.Boyer,States Against Markets: The Limits of Globalization;  Thomas Palley; Plenty of Nothing: The Downsizing of the American Dream and the Case for Structural Keynesianism;  Adrian Ham, Treasury Rules: Recurrent Themes in British Economic Policy;  James Rock, ed. Debt and the Twin Deficits Debate;  Warren Young,Interpreting Mr. Keynes: The IS LM Enigma;  Peter Clarke, The Keynesian Revolution in the Making;  A. Carabelli, On Keynes’ Method;   J.A.Trevithick, Involuntary Unemploment:Macroeconomics From a Keynesian Perspective;  A.Asimakopulos, Keynes’ General Theory and Accumulation;  Victoria Chick, Macroeconomics after Keynes;  David Colander & Dewey Daane eds. The Art of Monetary Policy  Maurice Lamontagne, Business Cycles in Canada;  Frank Hahn, Money and Inflation;  William Greer, Ethics and Uncertainty:The Economics of John Maynard Keynes and Frank H. Knight;  Lydia & Maynard eds. Polly Hill&Richard Keynes;  Jan Marsh, Bloomsbury Women: Distinct Figures in Life and Art;  Quentin Bell, Virginia Woolf:A Biography;  Frances Spalding, Vanessa Bell;  Leon Edel ,Bloomsbury;  G.E.Moore, Principia Ethica ; Armand Van Dormael,Bretton Woods:Birth of a Monetary system;  Allan Meltzer, A History of the Federal Reserve ; Milton Friedman & Anna Schwartz,A Monetary History of the United States;  Milton Friedman,Capitalism and Freedom;  Lanny Ebenstein, Milton Friedman . Milton and Rose Friedman, Two Lucky People; James Tobin, Full Employment and Growth:Further Keynesian Essays on Policy.
 Key Internet sites:  http://www.Statistics Canada; OECD; Eurostat; U.S. Bureau of Labour Statistics;Statistics Canada;The Federal Reserve,European Union;Henwood’s Site; New York Times. The Financial Times.The Hayek list. The post-Keynesian list; The Wall Street Journal;
Evaluation: Students will be expected to make a presentation to the seminar, , complete a major paper and write a test.They will also be expected to be regular , informed and active members of the seminar. To be informed obliges one to do significant reading and attend the seminar regularly.  Presentation and participation – 20 % ;Essay – 40 %; Test – 40   % .
Topics Outline:
1. Introduction and Overview.Why study the work of Keynes ? Contemporary economic orthodoxy. New technology and the business cycle. Globalization. The return of intervention and planning post 9/11, the New Orleans effect.The crash and  financial crisis,the recovery its origins and prospects.Financial derivatives, the collapse of Wall Street and TARP.Canadian versus American conditions. Stimulus and deficit finance and deficit hysteria.
2. The macro-economic problem; The role of markets; laissez-faire and rational markets versus   economic regulation;Paul Volker’s critique of the new regulatory framework; the world of classical economics.The monetarist counter-revolution.The economics of full employment. Galbraith’s notions of countervailing power, the technostructure, corporate planning and the new industrial state.  The post modern age and the political economy of globalization and its impact upon policy making.An outline of an alternative model of market behaviour.OPEC and the theory of cartels.
3. Say’s law and the question of unemployment; the question of wage rigidity.The labour market clearing model. Wage flexibility, the natural rate of unemployment and inflation, the problem of aggregate demand.Aggregate supply.
4. Keynes before the General Theory:1. Keynes the quantity theorist;the Marshallian roots of Keynes. Keynes and Bloomsbury; The Economic Consequences of the Peace;
5. Keynes before the General Theory: 2 Keynes and G.E.Moore, The Tract and The Treatise; The Essay on Probability, The Economic Consequences of Mr.Churchill,   his liberal vision. Uncertainty.
6. The Fundamental Equations. the Treatise on money and the problem of inflation and unemployment. The death of inflation and the return of deflation? Cartels and futures markets and inflation.
7. The Great Depression, Keynes and the General Theory; Michal Kalecki .Uncertainty and the investment process; the role of speculation. the asset backed commercial paper crisis and the work of Hyman Minsky. The Canadian American reception of Keynes. The New Deal.
  8. The General Theory: towards a synthesis; Keynes versus
Hayek and the classics. Keynes and Shaw and Marx. The origins of quantitative easing. the Treasury view and bond market revenge.
 9. Neo-classical economics
and the bastardization of Keynes. Samuelson,Meade, Harrod, Timlin, Hicks and the IS -LM. The neo-classical synthesis and its vulnerabilities in the age of stagflation.
 10. Stagflation, the re-emergence of monetarism, the deficit and public finance, what to do with the surplus.Keynesian policy in a federal state.
11. Supply-side and rational expectations theory. The natural rate hypothesis. The natural rate of inflation versus the natural rate of unemployment.
12. Post -Keynesian theory and policy;New Keynesian theory; Canadian macro-economic policy since the war.Technology and economic growth. Can we banish the cycle ?
13. Rediscovering full employment.A look again at an alternative model to current orthodoxy.Integrating the natural rate of inflation, OPEC cartelization and interest rate policy. Capital versus current accounting in public finance. The conversion of the Bush Republicans to Keynesian technique and its impact upon policy making in the US. The Obama Democrats and the 787 billion dollar deficit financed stimulus. The Republican counter-attack and the conversion of the party back to Tea party fiscal conservatism;The Return of deficit hysteria. The Stiglitz- Krugman critique. the need for a second stimulus.The bond market.Harper’s cautious conversion to Keynesian deficits.  The road ahead.
Posted in austerity, business cycles, Canada, deficits and debt, fiscal policy, J.M.Keynes, U.S., Uncategorized, unemployment | Tagged | Leave a comment

One person’s expenditure is another person’s income

Posted on August 20, 2011 by haroldchorneyeconomist

John Maynard Keynes often stressed the importance of investment and consumption in stimulating an economy to produce an appropriate supply of jobs. He also less frequently explained how austerity as a policy followed by governments could be very damaging to the public good. He put the argument this way in Chicago in the Halley Stewart Lecture of 1931. It should be compulsory reading for policy makers.

I have spoken of competitive economy campaigns and competitive contractions of new development. …An economy campaign, in my opinion, is a beggar-my neighbour enterprise, just as much as competitive tariffs or competitive wage reductions, which are perhaps more obviously of this description. for one man’s expenditure is another man’s income. Thus whenever we refrain from expenditure, whilst we undoubtedly increase our own margin we diminish that of someone else; and if the practice is universally followed, everyone will be worse off. An individual may be forced by his private circumstances to curtail his normal expenditures, and no one can blame him. But let no one suppose that he is performing a public duty in behaving in such a way. An individual or an institution or a public body, which voluntarily and unnecessarily curtails or postpones expenditure which is admittedly useful, is performing an anti-social act…. (pp.74-75; Halley Stewart lecture, 1931 The World’s Economic Crisis and the Way of Escape, London:George Allen & Unwin )

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Japan’s rate of unemployment lower than conventional wisdom

Posted on August 20, 2011 by haroldchorneyeconomist

Much is being made these days of the possibility that Europe and the U.S. are going the way of Japan in terms of the risks of deflation and the freezing up of the financial sector complete with zombie banks. But before we leap to these sorts of conclusions lets examine a few facts about Japan and its economy. First off unemployment in Japan has historically been much lower than in either Europe or North America. There are certain problems with comparison since it is a long standing tradition in Japan that workers once over 55 take less responsible positions or retire earlier from the workforce than comparable workers in North America.

But if we consult the official unemployment data which is given by age cohort for unemployment since 1970 and for total unemployment back to 1953 we discover that Japan has on the whole very low unemployment. In fact during the 1950s and 1960s the monthly unemployment rate never rose above 2.7 %  and was usually below 2 %. During the period since then unemployment has not risen above 6.3 % and for much of the period was below 5 %.

Unemployment is higher among the age group 15-24  and somewhat higher among the group 55-64. Among the 15-24 year olds during the past 41 years monthly unemployment peaked at 10.8 % in March 2003. In June 2010 it also reached 10.6 %. But for most of the time period from 1970 to 1999 it was below 8%. From 2000 on it has worsened.

Nevertheless, although elevated youth unemployment in Japan is still well below the unemployment rate for young people in North America and Europe. The rate for unemployed people between the age of 15 and 24 in Canada is 14.1 % for July 2011 (source:Labour force survey Statistics Canada) . The rate for unemployed young Americans  16-19 year olds  is 25.1%; 20-24 year olds 14.9 % and 25-34 year olds 9.5 % .(source: U.S.Bureau of Labour Statistics) .

Unemployment rates for young people in Europe are outside of Germany, the Netherlands and the Scandinavian countries except for Sweden very elevated. Some examples; the rate of unemployment among 15-24 year olds for the European Union as a whole at the end of 2010,  21 %. Germany 9.0 % Greece 36.4 %; Spain 43.3 %; France 23.2 %; the U.K.20.3 %;Italy 28.4 %; Norway 9.0 % .

On the whole Japan is doing relatively well, at least as far as unemployment is concerned.

Posted in deficits and debt, fiscal policy, Japanese unemployment, U.S., Uncategorized, unemployment | Leave a comment

Stock market roller coaster continues:panic selling on gloomy headlines and iffy logic

Posted on August 19, 2011 by haroldchorneyeconomist

The Dow-Jones industrial average fell by just under 420 points reversing gains made over the past few days of trading apparently driven by negative headlines in the U.S. and Europe about unexpected weakness in the monthly manufacturing survey conducted by the Reserve Bank of Philadelphia, a continued weakness in the housing market, a larger than expected rise in the number of jobless claims to 408,000 and the on going unresolved difficulties in the European sovereign debt crisis. As a consequence sell orders multiplied as hedge funds and institutional investors fled equities, including many blue chip stocks for the safety of treasury bills and the supposed but frankly mythical safety of gold at the bubble price of $ 1843. The yield for short term American treasuries at one point during the day dipped below 2 % and the 10 year U.S. bond ended the day at 2.03 %. So far this evening the sell off continued in the Asian markets and Dow futures were also negative. Commodity prices for oil and wheat were also down .This is happening at a time when corporate profits are very high and while the risk of a double dip recession is greater than before there is no certainty of this and the economy may well muddle through and even surprise at this point in the business cycle. In these circumstances the views of one Wall street analyst that ”no one can figure out what to do with their money” ought to be considered the final word on rational markets theory. Monetary velocity has also slowed which reflects the liquidity trap nature of the circumstances that now prevail.A fiscal stimulus that soaked up these underutilized cash balances and offered partial tax incentives for purchasers of the bonds who also created jobs would be an effective employment program at this juncture.

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Dubious downgrade has consequences: Balance sheet recession requires fiscal stimulus and monetary accomodation

Posted on August 8, 2011 by haroldchorneyeconomist

Crises always teach participants important lessons. The key lesson from this avoidable crisis in the stock market is the urgent need to reform the rating agencies to ensure they actually understand something about the modern global economy and the history of financial crises and the appropriate response to them. Clearly Standard and Poor does not understand this.

The appropriate response was made clear during the great depression of the 1930s and it is crystal clear today. The G7 countries, the European union and their allies in Asia and Latin America need to understand that the correct policy is massive spending by governments to stimulate their economies, an increase in deficits as investments directed at employing people and supported by extremely low interest rates . This needs to be a much larger program than the one that was just conducted and it needs not to be undermined by cut backs at the state and local level. The large cash reserves from profits that are now parked at banks and in treasuries can thereby be productively put to use.

There are increasing numbers of economists who understand this although they may disagree about some of the details of the strategy. These include people like Richard Koo in Japan, Paul Krugman in the U.S., Joseph Stiglitz in the U.S.,Brad Delong in the U.S. Mario Seccareccia in Canada, Marc Lavoie in Canada,Peter Dimand  in Canada, Robert Skidelsky in the U.K, the various post Keynesians and Keynesians  in Britain including Sheila Dow, Tony  Thirlwall, Victoria Chick, Philip Arestis, Malcolm Sawyer, Peter Clarke and a number of other economists of similar persuasion in the  U.S., Australia, Japan and Canada. So far this morning (2:31 a.m. Montreal time) the stock markets in Asia are falling and futures suggest they will fall in Europe and New York.

But as direct evidence of how wrong S&P has been the demand for U.S. treasuries continues to be strong and their price has been rising and yields falling as investors flee equities to the security and reliability of U.S. treasuries. We shall see where this goes later today but the turmoil was unnecessary and damaging and its long overdue that some new thinking informed by a knowledge of history carries the day in economic policy.

Update: 12:36 p.m. Montreal time the Dow Jones industrial average is now down 324 points. 1:48 p.m. down 428 points.2:09 p.m. down 430.Down at close 634.

9:28 pm Montreal time, the sell off continues in Asia with markets down from 2.7 % to 6.3 %. One positive development is that the fall in commodity prices also includes a fall in oil prices to below $80 a barrel. Inflation clearly continues not to be a problem, except perhaps in China.

Tuesday update: the markets once again revealed their tendency to wildly fluctuate by bouncing back strongly in New York by about  430 points as low prices drew bargain hunters back in and the Fed reassured markets that interest rates would be kept very close to zero for the next two years until the economy is much stronger (and the 2012 election is out of the way). As usual markets are very irrational and bi-polar so we shall see what happens tomorrow.The rally may be a one day wonder but it may well continue to recover somewhat from the oversold position it reached on Monday. So far so good as they are also up in Asia following the good news in the U.S. Joseph Stiglitz has a good piece in the FT on the need for stimulus but is pessimistic on overcoming the gridlock in Washington politics. I am not so sure. I posted a comment which I will add to the blog a little later.

Wednesday update: Markets are down again by over 350 points in N.Y. The instability and bearish trend continues. Below is a link to Stiglitz’s article in the FT and if you scroll through the comments you will find mine  at Aug.10 @ 2:52 a.m.

http://www.ft.com/cms/s/0/c864cd58-c1d1-11e0-bc71-00144feabdc0.html#ixzz1UddyzAu4

Wednesday 6:27 pm update The Dow closed down 519 points wiping out the rebound of Tuesday. The stock market is now down by about 20 % from its  recent peak in April. today. The  downturn was linked by analysts to the banking ”crisis” in France.

Thursday morning Wall street futures moderately up suggesting a small rebound may occur.

Check out Robert Reich’s blog post http://www.robertreich.org where he argues for a major stimulus to be adopted by the Democrats as their policy thrust, despite the Republican opposition to this. We agree.

Thursday 12:43 the market in New York is now up by 278 points and is just shy of 11,000 on the Dow. Good news on Cisco profits and payroll numbers that beat expectations have along with contrarian bargain hunters have helped push the market part way back up the hill for the time being.    1:06 p.m. up 360 to 11100.

In France President Sarkozy is unwisely calling for further budget cuts in response to the pressure of the speculators who are buying credit default swaps on French debt which is nowhere near a place of crisis since the gross debt to GDP ratio is 81.7 % understandable since the unemployment is still 9.7% and the French like other leading European countries suffered some damage during the crash and crisis of 2008. Banning naked short selling may help.

Friday noon: Dow up again to 11,282 ,139.7 and 1.25 % on top of the 400 plus point rise at close yesterday. Program trades, bargain hunting and perhaps short selling ban in Europe have aided in regaining some of the lost ground. Have a look at the Nouriel Roubini interview in the Wall Street Journal. Very pessimistic, perhaps unduly so and provocative. But he is definitely correct in arguing that long run excessive inequality is societally  unsustainable and economically damaging.

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Krugman is right, job creation top priority.

Posted on August 6, 2011 by haroldchorneyeconomist

Paul Krugman had an excellent piece in the New York Times the other day(The Wrong worries, Aug.4,2011) to which I  along with more than 500 other readers responded with a comment. I am reproducing the comment below because I think it has some useful suggestions about job creation using both the spending power of the U.S. federal government, the state and local governments and the tax system.

All along I have been hoping that the economy might turn around based on the gradual rebound from the crash and crisis and the stabilization that the stimulus promoted. But now despite the most recent job creation data which resulted in a marginal decline of the unemployment rate to 9.1 %, given the deficit and debt hysteria that now is widespread and the very dubious downgrade of American debt by Standard and Poor which strangely used their Toronto analyst as their lead analyst in the process and made some serious mistakes about the actual size of the deficits and debt and who is also the author of a somewhat slanted dubious study on the ageing of the American population and the supposed excessive  burden of looking after them in their old age, as if looking after your parents and grandparents was somehow not a normal ethical obligation for a modern enlightened society, I am now not so optimistic. I will return to the bond raters’ revenge in a later post but for now, below is my NYT comment.

I agree with Paul Krugman. The positive effects of the earlier stimulus have now largely petered out undermined by state and local government cuts, ill timed austerity initiatives at the federal level, and the failure of the private sector to respond by using their very substantial cash reserves from both corporate profits and bail out monies to hire workers. The stock market sell off now underway will only worsen the situation.There should be an immediate and very substantial program of direct employment creation in co-operation with state and local authorities bankrolled in part by the federal government despite the constraints of the budget control act . There should also be a tax measure that is partly refundable upon the creation of jobs by the private sector applicable to large corporations that have extraordinary cash reserves. The employment creation programs could be financed through the sale of special employment bonds some of which the federal reserve could buy and add to their balance sheet. Corporations and individuals who bought the bonds could also use them as partial credits against their tax obligations. A domestic job corps should also be established to help the long term unemployed .A wide range of cultural projects, community based grass roots projects, environmental projects,projects to aid the homeless and parks projects should be included in such a program.The focus at all times should be on reducing the unemployment rate to below 6 % as a first step on the path to true recovery. If these kinds of measures are not taken I am quite worried that the economy will be stuck for a long time in a situation of chronic high unemployment. The best and at this point only sensible way to reduce the long term debt is to dramatically lower the rate of unemployment. We learned this lesson from the events of the great depression of the 1930s and the experience of war-time and it is a lesson that should never have been forgotten. (Haroldchorneyeconomist.com)

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