And you are here why?

In comic form , by the ever-humorous SMBC

Well, you could see this coming up 5th Avenue.  Oliver Blanchard, chief economist at the IMF (motto Austerity Will Cure What Ails Ya! ) has a new paper out - Growth Forecast Errors and Fiscal Multiplier s - which basically sez. "We Wuz Wrong" . Huh? Well, if you recall the serious suffering going on in Europe over the last few years (Ireland, Greece, Spain, Portugal), the main thrust has been something along the lines of "Your economy is slowing down, so you need to enact serious budget cuts" .  In the immortal words of Dalton, Pain Don't Hurt . (You have seen Road House, right? Greatest movie ever ?) The problem with this math as virtually everyone not in Germany, Britain, or the IMF has been pointing out is that If    - Your economy is shrinking, and    - You cut government spending, and    - You raise taxes then    - Your economy shrinks even more, and    - More people end up out of jobs, and   ...

There has been quite a hubub in the blogosphere recently about the State Of Macroeconomics.  Noah Smith has a pretty decent encapsulation of the discussion , (started by Paul Krugman , rebutted - poorly - by Steve Williamson , and followed up by Brad DeLong and John Quiggin ). I really don't have much to add to this, except to say that by pretty much any stretch of the imagination Most (all?) of the "modern" macro models have failed, and failed spectacularly DSGE sucketh profoundly Keynes really was a genius. As is Zach Weiner

The Solow model says many things , but one of the highly observable ones is that the income levels of poor countries will tend to converge towards that of rich countries.  More to the point, it'll converge towards those rich countries with similar characteristics. The point? Ah. The point being that if the country that is going to eat your shirt ( China! Japan before that! Germany! etc.) is starting from a lower baseline than you, odds are that the closer it gets to you, the more it slows down. Or, to put it differently, you can't assume that a country is going to grow at 8% for the next 20 years just because a country grew at 8% for the last 20 years.  So yeah, 20 years from now, China isn't going to have flying cars and free ponies. Noah Smith has a pretty good take on this based on the question - What happened to Japan in 1991 ? As he puts it Basically, by 1990, Japan had caught up to the richest large nations in terms of per capita GDP. The only way for Jap...

The Chicago School has a lot to answer for, and the Efficient Markets BS is probably right up there on the top of the list.  Exhibit A is the recent purchase of 800 AOL Patents for $1 Billion , which promptly caused AOL's stock to shoot up 45% .  Sooo, there are a bunch of analysts watching AOL's stock, and they are (theoretically) intimately aware of AOL's assets, revenues, blah, blah.  And none, none of them predicted this.  Ditto for the public.  Ditto for the market.  In short, our oh so rational and efficient market bit the big kishko on this one. I know, I know, the Chicago apologists are out there right now saying " on average the markets are rational ", " in the long run its efficient ", etc., etc. And, to quasi-quote Keynes (oooh, that should piss of the Chicago-ans), "In the long run, we are all dead ". A theory that doesn't actually work all that well, and which is pretty useless at making any form of predictio...

The Washington Post has a long (5 pages!) article 'bout Modern Monetary Theory, a "coming into the mainstream" school of macroeconomics that emerged in the 90s , and is kinda, sorta, vaguely post-Keynsian.   Mind you, after the entertainment caused over the last few decades by the Chicago School, I'll take shamanism as an alternative, but still MMT does seem to have some nifty ideas going for it. The article was somewhat (but only somewhat) well written, but it doesnt capture the essential difference of MMT.  Now, along comes Isabella Kaminska (of FT Alphaville fame), with a nice writeup on MMT emphasizing this very point . (the theory) is naturally divisive because most of the time it fails to communicate its message succinctly. Which is weird, since the premise is actually fairly simple to understand. We’d say it’s akin to looking at an   autostereogram . Once you get it, you never see things quite the same way again. But at the same time, try as they mi...

Noah Smith has rips DSGE a bit of a new one .  Mind you, not as comprehensively and as thoroughly as John Quiggins in Zombie Economics (What?  You haven't read it?  You Must!), but its all the more savage because it is somewhat incidental to his main point, that a lot of modern Macroeconomics is politically motivated. To quote By contrast, it's pretty  easy   to make a DSGE model in which government plays no useful role, and can only mess things up. So what ends up happening? You guessed it: a macro literature where most papers have only a very limited role for government. In other words, a macro literature whose policy advice is heavily tilted toward the political preferences of conservatives. Is that bad? Not necessarily. If the facts had a well-known conservative bias - i.e., if   the models that fit the data best   were the models that implied no role for government - then that would just be too bad for liberals! Liberals would have to acc...

Brought to you by the inimitable Yoram Bauman, the world's first (and last?) Stand-Up Economist.

John Maudlin writes an extremely understandable - if long - summary of the problem in Europe (hint:  Its not Just Greece).  He highlights the three main issues     * Insolvent Banks     * Insolvent Countries     * Trade Imbalances. Thats a pretty solid trifecta, and at quite an insurmountable problem.  No matter how hard you wish, you can, at most, fix two out of three of Private Sector Debt , Public Sector Debt, and Trade Deficits .  Its unfortunate, and its tragic, but it is also basic math (the money has to come from somewhere after all. And yes, we're not in charge of our own currency here). Which brings us to the bottom line - if Europe is going to "fix itself", then Germany is going to have to start running trade deficits.  And what do you think the odds of that are? Ergo, as John puts it Greece and the other peripheral countries face a difficult choice. Do we stay in the euro and pay as much as we c...