paradox of thrift

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pages: 330 words: 77,729

Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen

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Historically, the evidence is overwhelming: higher saving rates lead to higher growth rates-just the opposite of the standard Keynesian prediction. As one recent Keynesian textbook declared after teaching students about the paradox of thrift: "The fact that governments do not discourage saving suggests that the paradox of thrift generally is not a real-world problem" (Boyes and Melvin 1999, 265). But then why teach the paradox of thrift at all? Not only is it historically unproved, but it is fundamentally flawed. The problem is that Keynesians treat savings as if it disappears from the economy, that it is simply hoarded or left languishing in bank vaults, uninvested.

Thus, a new federal spending program is preferred over a tax cut by Keynesians because the expenditure side is considered a more potent weapon against recession than a tax cut. A T U R N I N G POINT IN T W E N T I E T H - C E N T U R Y ECONOMICS 173 Figure 6.2 Samuelson's "Paradox of Thrift" Saving and Investment Diagram Shows How Thriftiness Can Kill Off Income Gross National Product (billions of dollars) Note: Q* = Full employment output or GNP. Source: Samuelson and Nordhaus (1989: 184). Reprinted by permission of McGraw-Hill. The Paradox of Thrift Denies Adam Smith The second way out of a recession is to increase the public's propensity to consume, which would shift saving schedule S to the right. Note that in the Keynesian model, if the public decides to save more during an economic downturn, it only makes matters worse.

Amazingly, Mankiw's textbook does not mention most of the standard Keynesian analysis: no consumption function, no Keynesian cross, no propensity to save, no paradox of thrift, and only a brief reference to the multiplier. Thus, we have a sea change in economics, and this coming from Cambridge, Massachusetts, the same place the Keynesian revolution originated in America. Samuelson: Fiscal Policy Dethroned! Even Paul Samuelson has been forced to change his focus in recent editions of his text, in part because of the force of history, in part due to the influence of his coauthor, Bill Nordhaus. Samuelson's fiftieth anniversary edition (1998) is telling. In addition to the replacement of the paradox of thrift with a prosavings section and the statement that "a large public debt is likely to reduce long-run economic growth" (Samuelson and Nordhaus 1998, 652), the biggest shock is Samuelson's abandonment of fiscal policy.


pages: 242 words: 71,943

Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity by Charles L. Marohn, Jr.

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They can be dominated by small-minded thinking, by parochial concerns. In a society as connected and outwardly affluent as ours, where experts in all realms peddle their own low-pain rescue remedies for the challenges we face, American society has developed a low tolerance for the messy and chaotic. A Paradox of Thrift or Avarice? Keynes identified the Paradox of Thrift, the damage done to the national economy when individuals and organizations save instead of spend during an economic downtown, but what about the opposite? What about a Paradox of Avarice, where individuals and organizations don’t save but spend all they have? And more.

The Infrastructure Cult The American Society of Civil Engineers Real Investment, Paper Returns Accounting for Infrastructure Assuming Secondary Effects A Real Return on Investment The Data Doesn’t Lie Notes Chapter 5. Growth or Stability Where Does Strength Come From? Depression Economics The Last Country Standing The Post-War Boom Struggling with Constraints Going All In on Debt Does Growth Serve Us? The Difference Between Growth and Wealth A Paradox of Thrift or Avarice? Notes Chapter 6. Rational Responses A Long Decline Restoration of Normal Making Difficult Decisions within a Complex, Adaptive System Notes Chapter 7. Productive Places A Simple Math Problem The Financial Strength of the Old and Blighted Downtown versus the Edge Value per Acre Lafayette’s Return on Investment Personal Preferences Notes Chapter 8.

With his response to the Depression, Roosevelt was following the economic theories of John Maynard Keynes. One of the truly great minds of the twentieth century, Keynes identified a paradox that has become orthodoxy: Although cutting back on spending during a difficult time was logical for an individual, when everyone did likewise, things quickly went from bad to worse. Called the “paradox of thrift,” the corrective response was for the government to step in and stimulate the economy, filling the void left by declining personal spending. Thus began decades of debate over Keynesian economic policies, a disagreement as unresolvable as it is fundamental. One economic denomination believes that recessions are healthy.


Phil Thornton by The Great Economists Ten Economists whose thinking changed the way we live-FT Publishing International (2014)

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If consumers are cutting spending at the same time as businesses are cutting investment the result is recession. Keynes pointed out that if everyone took steps to save money this would actually lead to lower aggregate savings in the long run as there would be less economic growth – an idea he called the ‘paradox of thrift’. If planned savings exceed planned investments that would lead to a downward pressure on growth, while an excess of investment would stimulate it. It is the instability of investment that is a prime cause of downturns. In its most simplistic form unemployment is caused by a lack of investment.

Some of his important ideas include: • His prediction that the reparations demanded by the Allies after the First World War were so large they would leave Germany perpetually poor and, therefore, politically unstable. • His introduction of the concept of aggregate demand as the sum of consumption, investment and government spending. • The idea that full employment could be maintained only with the help of government spending. • The paradox of thrift that if everyone tries to save during a recession the effect will be to cut consumer spending, leading to job losses and business failures and a worse recession. • The multiplier effect that says government spending of £100 that boosts people’s incomes will have a greater economic impact as those people will spend more money, so creating more jobs. • Wage stickiness – the idea that workers will refuse to accept cuts in their wages. • His work, The General Theory, is considered the foundation of modern macroeconomics. • The Keynesian school of economic thought, which takes his name, is one of the principal doctrines taught at colleges and universities.

Samuelson described himself as a ‘cafeteria Keynesian’ – taking the bits that suited him.4 Key Keynesian concepts such as the 3. P. Samuelson, ‘Lord Keynes and the General Theory’, Econometrica, 14 (1946), 187–99. 4. http://www.theatlantic.com/politics/archive/2009/06/an-interviewwith-paul-samuelson-part-one/19572/ 172 The Great Economists fiscal multiplier, the propensity to consume, the paradox of thrift, countercyclical fiscal policy and the concept of GDP being the sum of private spending, government spending and investment took centre stage in the book. Samuelson said that ‘private enterprise’ was frequently hit by ‘acute and chronic cycles’ in unemployment, output and prices, which governments had a duty to ‘alleviate’.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

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Saving may seem “virtuous” when considered in isolation—as may a balanced budget, which is the principle underpinning Germany’s economic policy (Dumas 2010: 168)—but under the circumstances that prevail in the Eurozone, where there are significant current account imbalances between core and peripheral states, there is a classic paradox of thrift. In these terms, the Eurozone faces a dilemma between the interests of individual member states and what is in the collective interest, which relates to the problem of maintaining the integrity of the system as a whole. This paradox mirrors Bataille’s perspective of general versus restricted economy.

Hoarding is a problem for money in a number of ways, not the least of which is that it is inherently deflationary. Countering it by keeping money in circulation is therefore a significant theme in the literature on monetary reform. The danger posed to our collective economic well-being by individual thrift (or hoarding) is often referred to as the paradox of thrift. The paradox exists by virtue of an elementary fallacy of composition. Behavior that looks beneficial from the individual’s perspective can be collectively harmful when others adopt the same behavior: if everyone saves, the economy stands still. Mandeville captured the idea in Fable of the Bees (1705)—“Bare Vertue can’t make Nations live / In Splendour” (Mandeville 1989: 76)—and Keynes popularized it when, citing Mandeville, he drew an explicit connection between the “evils of unemployment” and the “insufficiency of the propensity to consume” (Keynes 2008: 326).

Other economists, too, remarked on a similar phenomenon, each emphasizing the disparity between part and whole: for example, Adam Smith (as Keynes reads him) when remarking that “What is prudence in the conduct of every private family can scarce be folly in that of a great Kingdom” (Smith 2008: 293); John Robertson in The Fallacy of Saving (1892) when he states that “Had the whole population been alike bent on saving … industrial paralysis would have been reached” (Robertson 1892: 125); and William Foster and Waddill Catchings in The Dilemma of Thrift (1926) (Foster and Catchings 1926). Invariably, the paradox of thrift tends to be discussed most urgently during an economic depression: Irving Fisher wrote about the problem during the 1930s (Fisher 1933), and Paul Krugman (among others) has drawn attention to it in relation both to Japan’s “lost decade” (Eggertsson and Krugman 2012) and the aftermath of the 2008 global banking crisis (Krugman 2012: 51–52).


pages: 162 words: 51,473

The Accidental Theorist: And Other Dispatches From the Dismal Science by Paul Krugman

"Robert Solow", Bonfire of the Vanities, Bretton Woods, business cycle, clean water, collective bargaining, computerized trading, corporate raider, declining real wages, floating exchange rates, full employment, George Akerlof, George Gilder, Home mortgage interest deduction, income inequality, indoor plumbing, informal economy, invisible hand, Kenneth Arrow, knowledge economy, life extension, new economy, Nick Leeson, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, price stability, rent control, Ronald Reagan, Silicon Valley, trade route, very high income, working poor, zero-sum game

True, some realized very early that Keynes’s picture was oversimplified; in particular, that the level of employment and output would normally feed back to interest rates, and that this might make a lot of difference. Still, for a number of years after the publication of The General Theory, many economic theorists were fascinated by the implications of that picture, which seemed to take us into a looking-glass world in which virtue was punished and self-indulgence rewarded. Consider, for example, the “paradox of thrift.” Suppose that for some reason the savings rate—the fraction of income not spent—goes up. According to the early Keynesian models, this will actually lead to a decline in total savings and investment. Why? Because higher desired savings will lead to an economic slump, which will reduce income and also reduce investment demand; since in the end savings and investment are always equal, the total volume of savings must actually fall!

Instead of an invisible hand pushing the economy toward full employment in some unspecified long run, we have the visible hand of the Fed pushing us toward its estimate of the noninflationary unemployment rate over the course of two or three years. To accomplish this, the board must raise or lower interest rates to bring savings and investment at that target unemployment rate in line with each other. And so all the paradoxes of thrift, widow’s cruses, and so on become irrelevant. In particular, an increase in the savings rate will translate into higher investment after all, because the Fed will make sure that it does. To me, at least, the idea that changes in demand will normally be offset by Fed policy—so that they will, on average, have no effect on employment—seems both simple and entirely reasonable.

What has made it into the public consciousness—including, alas, that of many policy intellectuals who imagine themselves well informed—is a sort of caricature Keynesianism, the hallmark of which is an uncritical acceptance of the idea that reduced consumer spending is always a bad thing. In the United States, where inflation and the budget deficit have receded for the time being, vulgar Keynesianism has recently staged an impressive comeback. The paradox of thrift and the widow’s cruse are both major themes in William Greider’s latest book, discussed in the first essay. (Although it is doubtful whether he is aware of the source of his ideas—as Keynes wrote, “Practical men, who believe themselves quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”)


pages: 1,172 words: 114,305

New Laws of Robotics: Defending Human Expertise in the Age of AI by Frank Pasquale

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This is not a new problem; Keynes recognized it in the early twentieth century as a “paradox of thrift,” threatening to condemn struggling economies to a downward spiral of deflation: lower prices, lower pay, and consequent unwillingness of consumers to spend even on low-priced goods, leading to even cheaper prices and a reinforcement of the same disastrous dynamic. From the United States in the 1930s to the Japan of the 2000s, this paradox of thrift has afflicted real economies. And it is clearly one of the biggest problems arising out of a future of mass automation, where tens of millions of workers may be replaced by machines. Strangely, the paradox of thrift barely registers in contemporary economic thinking about automation and labor, when it appears at all.

See international humanitarian law immigration, 52–53 India, 82, 92, 132, 136, 154, 159 inflation, 193–194, 195–196 infrastructure, 21, 169, 177, 182, 184, 185 Instagram, 47, 100, 103 Institute of Electrical and Electronics Engineers, 176 insurance, 14, 48, 246n36; and credit scores, 10; and data trails, 80; health, 34, 43, 44, 184 intellectual property, 182, 201 intelligence augmentation (IA), 13, 14, 199 intelligence services, 143 International Campaign to Ban Landmines (ICBL), 156 International Committee for Robot Arms Control, 156 international humanitarian law (IHL), 150, 155–156 international law, 123 International Monetary Fund, 25 i-Que Intelligent Robot, 74, 257n46 Iran, 167 Iraq, 149, 154, 160, 168 iris recognition, 138 Ito, Joi, 53 Jaeggi, Rahel, 117 Japan: acceptance of robots in, 53–54; elderly population in, 52; military power in, 291n74; the paradox of thrift in, 189; the right to be forgotten in, 106–107; traditional classrooms in, 81. See also Dumb Type; Paro; Robear; Saya; Tamagotchi “Jill Watson” (JW; bot), 61 job training. See education; workers Johnson, Mark, 212–213 Jones, Alex, 94 Joseph, Lawrence, 202; “Visions of Labour,” 220–223 journalism: and AI as a helpful tool, 2, 91; devastated by digital transition and in need of revitalization, 29, 30, 116–118; and the importance of genuine reporting and human values, 5, 28, 171, 192; and the vetting of news and online media content, 18, 93, 95, 113–115 Kaminski, Margot, 80 Kashmir, 154 Kelly, Sean Dorrance, 218–219 Kenya, 92 Keynes, John Maynard, 189, 194, 195, 224; Keynesian economics, 181, 183, 191, 194–195 Khan Academy, 84 “killer robots.”

See education: online online media, 29–30, 89–92; absentee ownership of, 95–98; destructive content on, 92–95, 101–102; restoring responsibility in, 98–101, 103–104, 108–110, 113–118; and the right to be forgotten, 105–107. See also social media operating system (OS), 72, 204, 213–214 Oppenheimer, Robert, 205 Osnos, Evan, 95–96 Ottawa Accord, 157 Pakistan, 153, 154, 168, 212 Palantir, 165 pandemics, 11, 127, 165, 169, 184, 195. See also COVID-19 Papert, Seymour, 78 “paradox of thrift,” 189 Parkinson’s disease, 98, 133 Paro (Japense robotic stuffed animal), 51–52, 55, 79 pattern recognition, 36 Pavlov, Ivan, 67 Pax Christi, 156 Pearson, 71–72 Pentagon, 164 pharmaceuticals. See drugs Philippon, Thomas, 183 Pichai, Sundar, 111 Piketty, Thomas, 222 pill-cams, 42 pink collar jobs, 190 Pokémon, 79 policing, 122, 143, 200; and military technologies, 10, 167, 168; perils of robotics in, 26, 30, 122–131, 146; and self-driving cars, 21, 22; usefulness of big data to, 165; and violence against minorities, 122.


pages: 586 words: 160,321

The Euro and the Battle of Ideas by Markus K. Brunnermeier, Harold James, Jean-Pierre Landau

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As each individual bank tries to deleverage in order to be micro-prudent, paradoxically the overall (endogenous) risk in the economy rises. The “Paradox of Prudence,” that micro-prudent behavior leads to macro-imprudent outcomes, is analogous to Keynes’ Paradox of Thrift.2 The old paradox of thrift is about the level of consumption and savings—as discussed in chapter 8, each individual’s attempt to save more leads ultimately to less savings in the macroeconomy, while the new paradox of thrift is about risk. Each individual bank’s attempt to reduce risk leads to overall more macro risk. SPIRALS IN THE NONFINANCIAL SECTOR But it is not only banks that suffer from impaired balance sheets; end borrowers, who were only mentioned in passing in the analysis above, generally have similar problems.

Second, in this Keynesian world, a decrease in the share of income dedicated to spending—that is, a conscious, economy-wide effort to increase savings—may well be counterproductive. The share of income saved will of course rise, but overall income may fall so much that aggregate savings also go down. This is the so-called paradox of thrift. And, third, in a world of heterogeneous agents (with different marginal propensities to consume), fiscal measures should target those individuals who tend to spend a large share of their income. If, for example, the measures were targeted at individuals who only spend 50 percent of their income, the multiplier would only be 5.

See capital flows international economics, 74–82 International Monetary Conference of the United Nations, 288 International Monetary Fund (IMF), 20–24, 287–89; Cyprus bail-in by, 198, 199; Decision on Bilateral Surveillance over Members’ Policies by, 259–60; ECB opposition to, 327–28; economic philosophy of, 12; EFSM/ESM and, 131–32; during euro crisis, 269, 295–300; Greek bailout by, 181; loss of credibility of, 306–12; moral hazard issue in aid from, 66; philosophy of, 289–95; special drawing rights (SDRs) of, 132–33; Strauss-Kahn’s resignation from, 304–6; in troika, 25, 300–304 international monetary system, 259–61 Ireland, 20–21; anti-austerity party in, 38; bank bailouts in, 173; bank debts in, 303–4; diabolic loop in, 183; direct recapitalization of banks in, 196; ELAs in, 337–40; emigration of youth from, 245; government guarantees in, 194–95, 200; housing bubble in, 168–69; on IMF board, 296; IMF program for, 308; inflation rate in, 178; Sinn Fein in, 232 Irish Nationwide Building Society, 338 Islam, 378; terrorism tied to, 382 Issing, Otmar, 318, 367, 373 Italy, 237; banks in, 202–3; centralism in, 43; credit rating of, 353–54; currency adjustments by, 80; decline of, 245–48; ECB and, 334–36; ECB’s letter to, 94; economic challenges facing, 242–45; economic philosophies in, 237–38; economic stimulus in, 148; euro crisis in, 31; in European economic debate, 2; European Parliament elections in, 36; IMF and, 21–22, 310; interest rates on bonds of, 351, 352; Mezzogiorno in, 109; national debt of, 127–28; regional development in, 239–41; reputation in monetary policy of, 91–92; Russian natural gas pipeline to, 285; unemployment insurance in, 102; varied economic theories in, 10–11; withdraws from European Exchange Rate Mechanism, 82 Iuzzolino, 239–40 Jackson Hole (Wyoming), 360–61 Jacobsson, Per, 293 James II (king, England), 88 Japan, 194; on IMF board, 296; intergenerational inequality in, 244; lost decade in, 180, 204; quantitative easing used by, 364; zombie and vampire banks in, 189 Jefferson, Thomas, 252 Jospin, Lionel, 135 Juncker, Jean-Claude: on capital markets union, 221; on escalating conflicts within Europe, 285; as European Commission president, 19, 37, 276; on European structural reforms, 145 Kagan, Robert, 4 Kaka (soccer player), 192 Kenen, Peter, 100, 103, 105 Keynes, John Maynard, 63, 64; on “fallacy of composition,” 138–39; on international monetary system, 78; not popular in France, 67; on Paradox of Thrift, 179; philosophy of IMF tied to, 289–91, 298 Keynesianism, 11, 63, 380; in Italy, 238; New Keynesian models and, 142, 145, 187; Syriza support for, 152 King, Mervyn, 213, 268 Kinnock, Neil, 272 Kirchner, Christina, 261 Klasen, Karl, 53 Kohl, Helmut, 7, 382 Korea, 165, 262, 298 Krueger, Anne, 256, 294 Krugman, Paul, 141, 250; on Dark Ages, 6; on Greek exit, 266; Keynesianism of, 143; on Latvia, 147 labor: in Italy, 243–45; mobility of, 103–4; wages for, 106–7 labor unions, 51–53 Laffont, Jean-Jacques, 72 Lagarde, Christine: as French finance minister, 29; Greek debt and, 265–66, 307, 310; as IMF managing director, 288, 306 Laiki Bank (Cyprus), 199 Lamers Karl, 7 Lamy, Pascal, 290 Landesbanken (German state-owned banks), 158, 160, 165–66; direct recapitalization of, 195–96 language barriers, 376–77 large-scale asset purchase programs, 190–91 Larosière, Jacques de, 217, 290 Latin America, 291; debt crisis in, 330 Latin Monetary Union, 252 Latvia, 21, 147 Lautenschläger, Sabine, 371 Laval, Pierre, 67 Law, John, 57 Law and Justice Party (Poland), 275 LB Baden-Württemberg (German bank), 165 Lehman Brothers (firm), 148, 264, 326 lenders of last resort: central banks as, 192–93; ECB as, 332, 333, 349, 369; IMF as, 291–92 Lenihan, Brian, 339, 340 Lenin, V.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Bear Stearns, Berlin Wall, Bernie Madoff, Black Swan, bond market vigilante , Bretton Woods, British Empire, business cycle, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

But under this model, is there such a distinction between productive and consumptive credit? When a consumer buys a car on instalment, which he could not have paid for upfront, the auto manufacturer is able to step up production and thus can hire more workers, who can buy more cars and so on. Indeed, Keynes warned of ‘the paradox of thrift’. If consumers stop spending and start saving, then demand for cars will fall. The manufacturer will lay off workers. Their incomes will fall, giving them less scope to save. So the paradox is that the understandable desire of individuals to save may result in lower aggregate savings, as output and incomes fall.22 Some have seen this link between production, consumption and demand as a kind of hamster wheel of fruitless activity.

But the long period of stagnation, and the massed ranks of unemployed, undermined the classical economists’ case. Keynes offered a reasoned rebuttal. A recession was caused by a shortfall in demand, or to put it another way, an excess of saving (income can only be spent or saved). This led to the ‘paradox of thrift’. The decision to save might make sense at the individual level but proved to be disastrous at the aggregate level at a time when business confidence was weak. Money saved by a consumer is money not spent on goods and services. The lack of demand for goods and services causes companies to lay off workers.

The combination of paper money and the adoption of floating exchange rates, in the developed world at least, facilitated a massive increase in the volume of debt. While individual countries can recover from debt crises, global debt crises are much more dangerous. The problems experienced in the 1930s – the debt/deflation spiral, the paradox of thrift – have returned. Let us start with some simplified sums. Assume that a country has government debt equivalent to 100 per cent of its GDP, or annual output. And let us assume that the average interest rate on its debt is 5 per cent. This means the government pays out 5 per cent of economic output in interest payments.


pages: 453 words: 117,893

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low-wage service sector, manufacturing employment, market bubble, means of production, mittelstand, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Since some income is saved while the rest is consumed, the gap between consumption and production must be filled by investment if full employment is to be maintained. Classical economists had assumed that savings automatically became investment. Keynes’s insight was to treat savings distinctly. He discovered the ‘paradox of thrift’ that arises when, as more people try to save, the aggregate amount of savings in an economy actually falls. This happens because, as savings increase, consumption falls, which reduces total output, which in turn reduces the income from which savings are made. The problem gets worse the richer societies become since wealthier people tend to save a higher fraction of their income.

He opposed the US central banking system, the Federal Reserve, which had been set up in 1913. Hayek disapproved of the Fed’s role in economic ups and downs. It was not just monetary policy. Hayek also disputed the use of fiscal policy in moderating business cycles. His work was an early attack on John Maynard Keynes’s hypothesis of excess saving or the paradox of thrift, discussed in Chapter 6. One of these articles, the ‘Paradox of Saving’, published in 1929, had caught the attention of Lionel Robbins, a young economist who had been recently appointed head of the Economics Department at the London School of Economics and Political Science (LSE). Hayek was the same age as Robbins.

joint-stock companies Jones, Homer Journal of Economic Perspectives Journal of Political Economy JPMorgan Juncker Plan Kahn, Richard Kant, Immanuel Keynes, John Maynard and the backlash against globalization and the Bloomsbury Group and Bretton Woods System and budget deficits counter-cyclical policies and crowding out on depression/recession The Economic Consequences of the Peace fiscal activism and Friedman The General Theory of Employment, Interest and Money and government spending on government’s role in economy and Hayek and investors Keynesian revolution legacy life and times of and Marshall and Niemeyer and paradox of thrift at Paris Peace Conference Prices and Production and public investment and Robbins Robinson and Keynes/Keynesian economics and Schumpeter and ‘socializing investment’ A Tract on Monetary Reform and the Treasury A Treatise on Money wealth Keynes, John Neville Khrushchev, Nikita Knight, Frank Kodak Korea North South Krugman, Paul Krupp Kuznets, Simon labour force growth labour productivity and work incentive laissez-faire landowners Lassalle, Ferdinand Latin America currency crisis (1981–82) see also specific countries League of Nations Lehman Brothers Lenin, Vladimir Leontief, Wassily Lewis, Arthur Lewis, Barbara (‘Bobby’) Life Extension Institute Linda for Congress BBC documentary London London School of Economics and Political Science London Stock Exchange Long Depression (1880s) Lopokova, Lydia Louis XIV LSE see London School of Economics and Political Science Lucas, Jr, Robert Ma, Jack (Ma Yun) Maastricht Treaty macroprudential policy see also central banks; financial stability Malaysia Malthus, Thomas Manchester Mandela, Nelson manufacturing additive (3D printing) automation in China and deindustrialization GDP contribution in UK German high-tech and industrialization see also industrialization Japan ‘manu-services’ ‘March of the Makers’ mass-manufactured goods and national statistics reshoring rolling back deindustrialization process and Smith trade patterns changed by advanced manufacturing US Mao Zedong Maoism ‘March of the Makers’ marginal utility analysis marginalism market forces/economy ‘Big Bang’ (1986) competition see competition and economic equilibrium see economic equilibrium emerging economies see emerging economies Hayek and the supremacy of market forces ‘invisible hand’ and laissez-faire and Marx 4 self-righting markets supply and demand see supply and demand Marshall, Alfred on approach to economics and the backlash against globalization and the Cambridge School and decentralization Economics of Industry and education’s role in reducing inequality and inequality and Keynes and laissez-faire legacy life and times of marginal utility analysis and Marx and poverty Principles of Economics and utility theory Marshall, Mary, née Paley Marx, Heinrich Marx, Henriette, née Pressburg Marx, Jenny, née von Westphalen Marx, Karl and agriculture and the backlash against globalization Capital and capitalism and China and class Communist Manifesto (with Engels) communist theories A Contribution to the Critique of Political Economy doctoral thesis The Eighteenth Brumaire of Louis Bonaparte and Engels journalism life and times of and Marshall and rate of profit and Ricardo and Russia on service sector workers surplus value theory and the Young Hegelians Marx, Laura Marx, Louise Marxism and the Austrian School and unemployment see also Marx, Karl Mason, Edward mathematical economics Mauritius May, Theresa Meade, James median income Menger, Carl mercantilist policies see also Corn Laws Merkel, Angela Mexico middle class China and economic growth and economic inequality and European revolutionaries income and industrialization and Keynes and Heinrich Marx as proportion of world population and Schumpeter social resentment US Mill, James Mill, John Stuart On Liberty Principles of Political Economy Minsky, Hyman Mises, Ludwig von Mitchell, Wesley mobile phones/smartphones monetarism see also Friedman, Milton monetary policy and Friedman tools see also quantitative easing (QE) see also central banks monopolies and Marx natural and Robinson and Schumpeter and Smith and Sraffa monopsony Mont Pelerin Society Morgenthau, Henry mortgage-backed securities (MBS) mortgage lending and the 2008 financial crisis sub-prime Myanmar Myrdal, Gunnar Napoleon I Napoleon III Napoleonic Wars national/official statistics China UK US national debt Austria and central banks China and creditors and debt forgiveness and deficits euro area and foreign exchange reserves and investment Japan major economies owed to foreigners and quantitative easing and Ricardian equivalent UK US Vietnam National Health Service (UK) National Infrastructure Commission (UK) Navigation Acts neoclassical economics convergence hypothesis ‘neoclassical synthesis’ New Neoclassical Synthesis see also Fisher, Irving; Marshall, Alfred; Solow, Robert Neoclassical Synthesis see also Samuelson, Paul New Classicists see also Lucas, Jr, Robert New Deal New Institutional Economics see also North, Douglass New Keynesians see also Stiglitz, Joseph New Neoclassical Synthesis New Rhineland News (Cologne) New Rhineland News: Review of Political Economy (London) new trade theory New York Herald New York Times New York Tribune Newcomb, Simon Newsweek Niemeyer, Sir Otto Nissan Nixon, Richard Nokia non-tariff barriers (NTBs) Nordhaus, William North, Douglass and the backlash against globalization and development challenges doctoral thesis The Economic Growth of the United States from 1790 to 1860 and institutions Institutions, Institutional Change and Economic Performance life and times of Nobel Prize path dependence theory and Smith North, Elizabeth, née Case North Korea Northern Rock Oak Ridge National Laboratory Obama, Barack Occupy movement oil industry Organisation for Economic Co-operation and Development (OECD) Osborne, George Overseas Development Institute (ODI) Oxford University Balliol College Paine, Thomas Paley, Mary Paris Peace Conference path dependence theory see also North, Douglass Peel Banking Act Philips, Lion Philips (electronics company) physical capital Physiocrats Pigou, Arthur Cecil Piketty, Thomas pin-making Pinochet, Augusto Ponzi finance populism Portugal poverty aid and development see economic development challenges eradication/reduction frictional and Marshall and Marx and median income people lifted from in South Africa productivity and agriculture ‘benign neglect’ of Britain’s productivity puzzle and computers and economic growth and education and factor reallocation and Germany and Hayek incentives and industry/industrial revolution and innovation and investment Japan and jobs labour see labour productivity and land low and Marshall moving into higher sectors of and pricing raising and Schumpeter and secular stagnation slow economic and productivity growth and the future and specialization and technology total factor productivity and trade and wages Prohibition protectionism agricultural see also Corn Laws Navigation Acts public-private partnerships public investment and Keynes public spending general government spending see government spending public investment see public investment squeeze see also austerity Puerto Rico quantitative easing (QE) Quantity Theory of Money see also Friedman, Milton; monetarism; Equation of Exchange Rand, Ayn RAND Corporation rate of profit rational expectations theory Reagan, Ronald recession/depression debt-deflation theory of depression Great Depression see Great Depression (1930s) Great Recession (2009) Greece ‘hangover theory’ of Hayek on and Keynes Long Depression (1880s) second recession (1937–38: recession within the Depression) in UK 1970s redistribution Regional Comprehensive Economic Partnership (RCEP) Reich, Robert reindustrialization Reisinger, Anna Josefina Remington Rand rent-seeking research and development (R&D) investment China Research in Motion (RIM) retail trade Rhineland News Ricardian equivalence Ricardo, David and the backlash against globalization and class comparative advantage theory and the Corn Laws Essay on the Influence of a Low Price of Corn on the Profits of Stock The High Price of Bullion international trade theory as a landlord life and times of as a loan contractor and Marx On the Principles of Political Economy and Taxation and Schumpeter and Smith wealth Ricardo, Priscilla Robbins, Lionel Robinson, Austin Robinson, James Robinson, Joan The Accumulation of Capital and the AEA and the backlash against globalization and communism Economic Philosophy The Economics of Imperfect Competition Essays in the Theory of Employment and imperfect competition Introduction to the Theory of Employment and Keynes and Keynesian economics life and times of and monopolies monopsony theory and Schumpeter and unemployment wage determination theory robotics Rodrik, Dani Rolls-Royce Roosevelt, Franklin D New Deal Russia 1905 Revolution and Lenin and Marx Samsung Samuelson, Paul and the backlash against globalization Economics factor-price equalization theorem Nobel Prize savings for capital investment and inflation and Keynes and the ‘paradox of thrift’ Say, Jean-Baptiste Schmoller, Gustav von Schumpeter, Anna, née Reisinger Schumpeter, Gladys, née Seaver Schumpeter, Joseph and the backlash against globalization as banker/investor Business Cycles and capitalism Capitalism, Socialism and Democracy ‘creative destruction’, innovation and ‘The Crisis of the Tax State’ and the Econometric Society economics and entrepreneurs on Fisher and Hayek History of Economic Analysis and Keynes legacy life and times of The Nature and Content of Theoretical Economics and perfect competition and Ricardo and Robinson Theory of Economic Development wealth Schumpeter, Romaine Elizabeth, née Boody Schumpeter Group of Seven Wise Men Schwartz, Anna Jacobson Schwarzenegger, Arnold Scottish Enlightenment Seaver, Gladys Ricarde see Schumpeter, Gladys secular stagnation self-interest services sector China and deindustrialization financial services see financial services global trade in services human capital investment invisibility of liberalization ‘manu-services’ and Marx move away from and national statistics output measurement productivity and innovation and Smith Trade in Services Agreement (TiSA) UK US shadow banking Shiller, Robert silver Singapore Skidelsky, Robert skill-biased technical change skills shortage small and medium-sized enterprises (SMEs) smartphones/mobile phones Smith, Adam and the backlash against globalization as Commissioner of Customs for Scotland economic freedom on ‘invisible hand’ of market forces and laissez-faire economics legacy life and times of and manufacturing and Marx and North and Physiocracy on rate of profit and rebalancing the economy and Ricardo and the services sector and state intervention The Theory of Moral Sentiments The Wealth of Nations social capital social networks social services socialism communist see communism vs welfare state capitalism Solow, Barbara (‘Bobby’), née Lewis Solow, Robert and the backlash against globalization with Council of Economic Advisers doctoral thesis economic growth model ‘How Economic Ideas Turn to Mush’ John Bates Clark Medal and Keynesian economics life and times of Nobel Prize Presidential Medal of Freedom and technological progress Sony Sorrell, Sir Martin South Africa South Korea Soviet Union and China Cold War collapse of see also Russia Spain specialization spontaneous order Sraffa, Piero stagflation Stanley Black & Decker state government regulation intervention in the economy laissez-faire STEM (science, technology, engineering and mathematics) workers sterling Stigler, George Stiglitz, Joseph stocks and Fisher and interest rates US railroad Strachey, Lytton Strahan, William Strong, Benjamin Sturzenegger, Federico Summers, Lawrence supply and demand see also market forces/economy: ‘invisible hand’ Sustainable Development Goals (SDGs) Taiwan Tanzania tariffs taxation and austerity devolved powers of flat for government deficit spending before Great Depression and inequality and investment Japan and Marshall negative income tax to pay off national debt Pigouvian tax progressive and Reagan redistribution through Schumpeter on Smith on Taylor, John Taylor, Overton H.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

"Robert Solow", Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Bear Stearns, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Blythe Masters, Bretton Woods, British Empire, business cycle, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Garrett Hardin, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Nixon triggered the end of the Bretton Woods system, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, tail risk, Tax Reform Act of 1986, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, Tragedy of the Commons, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

(In many cases, the person who did the applying was Samuelson himself!) But one area remained largely beyond the purview of rationality and individual choice: economic policy. In The General Theory, Keynes had emphasized that the logic of individual behavior often doesn’t apply to the entire economy, as evidenced by the “paradox of thrift.” For a single person, it often makes sense to cut back on spending and save money. But if everybody tries to save more at the same time, the overall level of spending will fall; firms will cut back on production and lay off workers. Ultimately, incomes will be reduced, and so, quite possibly, will total savings.

“[W]hile adulteration”—the adding of impurities—“is plainly opposed to the interests of the trade as a whole, it is nevertheless to the interest of every individual to practice it,” Keynes wrote. The only solution, he concluded, was for the Indian government to pass legislation to protect the buyers of jute. The paradox of thrift, which I mentioned earlier, is based on another fallacy of composition. If at the first sign of an economic downturn people start saving more—putting off kitchen renovations, going out to eat less often, and postponing the purchase of new cars—the construction, hospitality, and auto industries will be forced to lay off workers.

Newton, Isaac New York Cotton Exchange New Yorker, The New York Mets baseball team New York State Common Retirement Fund New York Stock Exchange New York Times, The Book Review New York University (NYU) Stern School of Business New York Yankees baseball team Nightingale, Florence “NINJA” mortgage loans Nixon, Richard Nobel Prize noise traders Nordhaus, William Northern Rock Norway Nothaft, Frank Obama, Barack Objectivist Newsletter, The October Revolution oligopoly “On an Economic Equation System and a Generalization of the Brouwer Fixed Point Theorem” (von Neuman) O’Neal, Stan On Liberty (Mill) Only Yesterday (Allen) “On the Economic Theory of Socialism” (Lange) “On the Impossibility of Informationally Efficient Markets” (Grossman and Stiglitz) Organisation for Economic Cooperation and Development Organization of Petroleum Exporting Countries (OPEC) O’Rourke, Kevin O’Toole, Bob Ove Arup Ownit Mortgage Solutions Oxford University Pacific Investment Management Company Padilla, Mathew paradox of thrift Pareto, Vilfredo Pareto efficiency Parker Brothers Pasternak, Boris Paulson, Henry “Hank” Pearl Harbor, Japanese attack on Pender, Kathleen Penn Square Bank Pennsylvania, University of, Wharton School of Business Pentagon Papers, The Pericles Phelps, Edmund Philadelphia 76ers basketball team Philippines Phillips, A.


pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, foreign exchange controls, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, Kenneth Rogoff, lateral thinking, London Whale, Long Term Capital Management, market bubble, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, Sam Peltzman, savings glut, tail risk, technology bubble, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

If businesses were pessimistic enough, even interest rates of zero could not coax them to invest. Individuals might rationally save more to protect their own financial security, but if everyone saved more and spent less, everyone’s income would go down, no one would be better off, and the economy would stay depressed. Keynes called this the “paradox of thrift.” It meant the economy could end up in a bad equilibrium rather than a good one. Thus was born a role for the government: if private individuals and businesses would not borrow and spend, the government would have to, and thereby push the economy back to “full employment,” which meant that everyone who wanted a job could find one.

But numerous other countries are more determined than ever to accumulate large piles of foreign assets as insurance against the chaos of global markets and to obviate the need for politically toxic bailouts. In 2014, those collective war chests stood at $12 trillion, double the precrisis level. This excess is an important reason why interest rates remain so low many years after the crisis. Keynes’s paradox of thrift has been reproduced on a global scale. How can this be remedied? Just as Social Security saves individuals from having to save for retirement and the Federal Reserve spares banks from stockpiling cash in case all of their depositors demand their money back, the world needs a lender of last resort to reassure countries that they don’t need to stockpile foreign reserves to help in an emergency.

If a country as a whole saves too much, it pushes down interest rates and encourages another country to borrow more, producing debt-driven asset bubbles and financial crises. If interest rates are already as low as they can go, a decision by everybody to save more and spend less simply reduces everyone else’s income and makes the country poorer. This is the paradox of thrift. In the face of this irony, what should we do? Can we truly foolproof our surroundings if we so often cause more mischief in doing so? Or should we be ecologists and allow natural systems to take their course? At the end of this journey, I concluded that the answer is neither: we must reconcile the engineers with the ecologists.


pages: 436 words: 98,538

The Upside of Inequality by Edward Conard

affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Albert Einstein, assortative mating, bank run, Berlin Wall, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Climatic Research Unit, cloud computing, corporate governance, creative destruction, Credit Default Swap, crony capitalism, disruptive innovation, diversified portfolio, Donald Trump, en.wikipedia.org, Erik Brynjolfsson, Fall of the Berlin Wall, full employment, future of work, Gini coefficient, illegal immigration, immigration reform, income inequality, informal economy, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invention of the telephone, invisible hand, Isaac Newton, Jeff Bezos, Joseph Schumpeter, Kenneth Rogoff, Kodak vs Instagram, labor-force participation, liquidity trap, longitudinal study, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, mass immigration, means of production, meta-analysis, new economy, offshore financial centre, paradox of thrift, Paul Samuelson, pushing on a string, quantitative easing, randomized controlled trial, risk-adjusted returns, Robert Gordon, Ronald Reagan, Second Machine Age, secular stagnation, selection bias, Silicon Valley, Simon Kuznets, Snapchat, Steve Jobs, survivorship bias, The Rise and Fall of American Growth, total factor productivity, twin studies, Tyler Cowen: Great Stagnation, University of East Anglia, upwardly mobile, War on Poverty, winner-take-all economy, women in the workforce, working poor, working-age population, zero-sum game

Keynes feared that a shock to the economy, like the terrorist attacks on 9/11 or the financial crisis, could send the economy into a self-reinforcing tailspin. A fearful economy would dial back consumption and increase saving. This would slow growth. Slower growth would cause investors to dial back investment, workers to lose their jobs, and asset values to fall. When that happens, consumers and investors save even more. Keynes called this the “paradox of thrift.” With no apparent self-correcting mechanisms, Keynes believed increased government spending, even if it were wasted, would boast demand, raise confidence, and break this vicious circle. Since the output will be lost forever if unemployed, it doesn’t matter if the government employs the labor to make candy and give it away—better to consume the lost labor than waste it.

If anything, government spending further misallocates resources that the economy must properly reallocate to accelerate growth. This increases risk when the economy is endeavoring to reduce risk and reallocate resources. That’s not to say that people don’t overreact in crises or that Keynes’s paradox of thrift doesn’t amplify downward business cycles. Under those circumstances, short-term Keynesian stimulus may prevent a temporary lull in demand or an overreaction from permanently damaging the economy. A bankrupt General Motors, for example, can permanently cede market share to foreign manufacturers, which it may never recover.

See also Federal Reserve monopsony, 98–99, 106, 108 moral licensing, 201–2 moral obligation, 195–216 compassion demotivating work, 204–10 prohibitive expense of solutions to poverty, 210–15 Moretti, Enrico, 237–38 mortgages, 53–54, 121–22, 132–34 lending by credit score, 133–34, 134 multiplier effect, 142–43, 149, 149n, 258–59 Murray, Charles, 167 negative interest rates, 144–45, 149–50, 151 nepotism, 10, 89 non-excludable goods, 29 Nordhaus, William, 76–77, 79 not-for-profit research, 68–70 Obama, Barack, 2, 77–78, 105, 140, 185, 212 offshoring, 11, 13, 44–45, 198 slowing wage growth and, 47–52 Okun, Arthur, 83n oligopoly, 87, 97–98, 103, 105, 106, 108, 113, 156 one percent. See top 1 percent online learning, 241–35 on-the-job training, 12, 19–20, 70, 184, 235, 254 Ottaviano, Gianmarco, 55 out-of-wedlock births, 156, 167, 210 overcollateralization, 122 Page, Larry, 12, 66, 69 paradox of thrift, 117–18, 125 Peri, Giovanni, 55, 56, 237 Perry Preschool Study, 229–30 Personal Consumption Index, 163, 163n Piketty, Thomas, 9–11, 88–92, 95, 155–56, 161–62, 185, 188, 250n political parties, 108, 140, 150, 243 population growth, 41–42, 117, 118, 119 poverty change in, by source of income, 208, 208–9 comparisons of causes of, 183, 183–84 expense of solutions to, 210–15 moral obligation to alleviate, 195–216 preschool education, 228–32 pricing power, 98–101 productivity corporate profits and growth in, 95–96, 103–4, 104 high-potential U.S. start-ups, 24–25, 25 information technology benefiting most productive workers, 17–18 investment in intangibles as percentage of GDP, 22–23, 23 minimum wage debate and, 109–10, 112 wages and growth in, 19–27, 21, 37–39, 79, 163–64, 164, 210–12 properly trained talent, 13, 18, 38, 39, 43, 50–51, 59, 81, 91–92, 110, 140–41, 186, 215, 236, 240, 254 property values.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

"Robert Solow", accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Bear Stearns, Black Swan, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, Post-Keynesian economics, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, tail risk, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus, zero-sum game

Just as we cannot all hold liquid assets (cash), since that depends upon someone else being willing to hold less-liquid assets (stocks or houses), we cannot all cut our way to growth at the same time. For someone to benefit from a reduction in wages (becoming more cost-competitive), there must be someone else who is willing to spend money on what that person produces. John Maynard Keynes rightly referred to this as “the paradox of thrift”: if we all save at once there is no consumption to stimulate investment. As we shall see, if one starts from the premise that investment and growth flow from confidence, then one misses this point rather completely. What matters is a “fallacy of composition” problem, not a confidence problem, in which what is true about the whole is not true about the parts.

The balance between state and market, the “can’t live with it, can’t live without it, don’t want to pay for it” problem that generated austerity as the default policy to deal with recessions, has been resolved entirely in favor of the state. In this world spending, and with it debt, especially by the government, becomes good policy. Individual saving as a virtue, in contrast, falls to the paradox of thrift: if we all save (the very definition of austerity), we all fail together as the economy shrinks from want of demand. Austerity was, then, in the eyes of liberals, after Keynes sacrificed on the altar of fiscal profligacy. Yet after two decades of failure, austerity’s arch defenders had little to say or show for all its virtue.

., 144 Kaupthing, 237 Keynes, John Maynard, 117, 119, 225 and Germany in 1940, 196 “Can Lloyd George Do It?”, 123, 124 General Theory, 126, 127, 145 in Germany, 195 in Ireland, 208 Keynesian economics, ix, 16, 39, 54–56, 122, 137, 140–141, 149 See also Phillips curve on austerity, 97–98, 101, 125–131 “paradox of thrift”, 8 rediscovery of, 221 Kinsella, Stephen, 61, 208 Kirkman, Geoffrey, ix Kirshner, Jonathan, 202 Koo, Richard “Balance Sheet Recession”, 211 Konczal, Mike, 212, 213 Krugman, Paul, 11, 55, 165, 207 and the euro, 78 Krups, 132 Kuronuma, Yuji, 197 Kwak, James, 11 Kydland, Finn, 157 Lagarde, Christine, 218 Landsbanki, 237 “Large Changes in Fiscal Policy: Taxes versus Spending” (Alesina and Ardagna), 173, 212 Latvia austerity in, 18, 103, 179, 216–226, 217 fig. 6.1, 221 Laval, Pierre, 202 Law, John and the national debt of France, 114 Lehman Brothers, 25, 29 leverage, 32 and banking, 25, 26, 32 of European banks, 89 ratios of, 48 liberalism, 98–101 See also neoliberalism liquidationism, 101, 119–122, 204 liquidity support, 45 List, Friedrich, 134 Lithuania austerity in, 18, 103, 179, 216–226, 217 fig. 6.1 Lloyd George, David “We Can Conquer Unemployment”, 123, 124 Lo, Andrew, 22 Locke, John, 17, 100–101 and austerity, 114–115 and the creation of the market, 105–106 as an economic revolutionary, 104–105 on taxes, 106 relationship between the market and the state, 115–122 Second Treatise of Government, 104 Long Term Capital Management.


pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

airline deregulation, Asian financial crisis, asset-backed security, bank run, banking crisis, bond market vigilante , Bretton Woods, business cycle, capital asset pricing model, Carmen Reinhart, centre right, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Gordon Gekko, Hyman Minsky, income inequality, inflation targeting, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Joseph Schumpeter, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low skilled workers, Mark Zuckerberg, Money creation, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, Paul Samuelson, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, salary depends on his not understanding it, Savings and loan crisis, Upton Sinclair, We are the 99%, working poor, Works Progress Administration

The combination of the liquidity trap—even a zero interest rate isn’t low enough to restore full employment—and the overhang of excessive debt has landed us in a world of paradoxes, a world in which virtue is vice and prudence is folly, and most of the things serious people demand that we do actually make our situation worse. What are the paradoxes of which I speak? One of them, the “paradox of thrift,” used to be widely taught in introductory economics, although it became less fashionable as the memory of the Great Depression faded. It goes like this: suppose everyone tries to save more at the same time. You might think that this increased desire to save would get translated into higher investment—more spending on new factories, office buildings, shopping malls, and so on—which would enhance our future wealth.

But in a depressed economy, all that happens when everyone tries to save more (and therefore spends less) is that income declines and the economy shrinks. And as the economy becomes even more depressed, businesses will invest less, not more: in attempting to save more as individuals, consumers end up saving less in aggregate. The paradox of thrift, as usually stated, doesn’t necessarily depend on a legacy of excessive borrowing in the past, although that’s in practice how we end up with a persistently depressed economy. But the overhang of debt causes two additional, related paradoxes. First is the “paradox of deleveraging,” which we’ve already seen summed up in Fisher’s pithy slogan that the more debtors pay, the more they owe.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

"Robert Solow", Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

An implication of the Keynesian argument is that it is misleading to think of the economy as a whole as if it were simply a single household. If one household saves more today with a view to spending more tomorrow, its income is unaffected. But if many households try to save more today, total spending falls and so do total incomes and actual saving – the so-called ‘paradox of thrift’. Only if households’ intention to save today and spend tomorrow can be communicated to producers might investment rise to offset the fall in consumption. But in the absence of a complete set of markets, no producer will receive a signal that the demand for her production in the future has increased.

As a result, we experienced, first, the calmness of the Great Stability, then the turbulence of the crisis, followed by the Great Recession. Policy-makers allowed the disequilibrium to build up, then correctly adopted a Keynesian response to the downturn in 2008–9 but failed to tackle the underlying disequilibrium. Understandably concerned with the paradox of thrift, they adopted policies that led to the paradox of policy – where policy measures that are desirable in the short term are diametrically opposite to those needed in the long term.35 Short-term Keynesian stimulus boosts consumption, reduces saving, and encourages households to borrow more. But in the long term, policy in the US and UK needs to bring about a shift away from domestic spending and towards exports, to reduce the trade deficit, to lower the leverage on household and bank balance sheets, and to raise the rate of national saving and investment.

., 308 resolution mechanisms, 256, 279 Richardson, Gordon, 176 risk, 84, 121–2, 123, 124, 126–9, 143, 254; implicit taxpayer subsidy for, 191–2, 207, 254–5; maturity and risk transformation, 104–15, 117–19, 250–1, 254–5; ‘optimising’ model, 129–31, 132, 134, 138, 309, 311; risk premium, 32–3, 115, 183; risk weights, 138–9, 258–9, 277 Robinson, Joan, 12, 292–3 Rodrik, Dani, 348 Rogoff, Kenneth, 44, 308 Rome, ancient, 59, 164, 216 Roosevelt, President Franklin, 91, 316 Royal Bank of Scotland (RBS), 37, 89, 118, 206, 243 Russia, 121, 159 saving, 101–2, 155, 308–17, 362–3; in emerging economies, 22–3, 27–8, 29, 30; ‘paradox of thrift’, 297, 326; ‘savings glut’, 28, 29, 30, 46, 319, 325; as source of future demand, 11, 46, 84–5, 185, 325–6, 356 Schacht, Hjalmar, 341–2, 343 Schäuble, Wolfgang, 211 Scholes, Myron, 120–1 Schumpeter, Joseph, 152 Schwartz, Anna, 192, 328 Scotland, 218, 243–7, 248 Second World War, 20, 21, 219, 242, 317, 342 secular stagnation theory, 44, 291–2, 355 Seneca, 123–4 11 September 2001 terrorist attacks, 124 ‘shadow’ banking system, 107, 112–14, 256, 262, 274 Shiller, Robert, 151 Silber, William, 206 Simons, Henry, 262 Sims, Christopher, 79 Slovakia, 216 Smith, Adam, 17–18, 54–5, 79–80, 163 Smith, Ed, 124 sovereign debt (government bonds), 32, 65, 92, 138, 182–4, 196–7, 203, 258, 259, 338–40; bond yields, 29, 183–4, 224, 227, 228, 231, 299, 336; in euro area, 162, 190, 224, 226–31, 258, 338, 339–40, 342–4; framework for restructuring, 346–7; need for export surplus before payment, 339–40, 341–3; WW1 reparations, 340–2, 343, 345–6 Soviet Union, 27, 68, 216 Spain, 47, 93, 159, 216, 221, 222, 227–8, 229, 257–8, 355, 363–4 special purpose vehicles, 113–14 stock markets, 102, 125–6, 133, 151–4, 194, 195, 200, 347 Stresemann, Gustav, 219 Summers, Larry, 44 Sweden, 159, 166, 173, 179, 216–17, 279, 335 Swift, Jonathan, ‘Thoughts on Various Subjects’ (1703), 250, 290 Switzerland, 33, 70, 100, 118, 184, 216, 335 Syed, Matthew, 124 Taylor, John, 168 technological change, 83–4, 127, 129, 153–4, 281, 291, 354, 355, 365 Tequila crisis (1994), 367 Thaler, Richard, 132 Thornton, Henry, 188 Tobin, James, 262 trade surpluses and deficits, 33, 34, 46, 319, 321–2, 329, 352, 356, 364; in emerging economies, 27–8, 30, 329; in EMU, 222, 232–3, 236, 363–4; and exchange rates, 22–3; and interest rates, 23, 30, 46, 319–20; likely re-emergence of, 48–9 trading, financial, 3, 24, 64, 99–100, 257; bonuses, 99, 101, 117, 144, 147; erosion of ethical standards, 100–1, 288; ‘front-running’, 153–4, 284 Transatlantic Trade and Investment Partnership (TTIP), 361 Trans-Pacific Partnership (TPP), 361 Trichet, Jean-Claude, 225 trust, 10, 81–3, 106; and monetary unions, 220, 232, 237; and money, 8, 55, 57, 66–71, 82–3, 155 Tsipras, Alexis, 230, 231 Tuckett, Professor David, 133–4 Turner, Adair, 324 Tversky, Amos, 132 unemployment, 38, 292, 293, 294, 297–9, 302, 326–7, 329, 330; in euro area, 45, 226, 228, 229–30, 232, 234, 345; and inflation targeting, 168, 169; and interest rates, 169, 298–300; ‘stagflation’ (1970s), 5, 302–3, 318 United Kingdom: Acts of Union (1707), 215; alternative strategies for pre-crisis period, 328–32; Banking Act (2009), 40; Banking and Joint Stock Companies Act (1879), 109; Banking Reform Act (2013), 40; ‘Big Bang’ (1986), 23; City of Glasgow Bank failure (1878), 108–9; commercial property market, 47, 118; Currency and Bank Notes Act (1914), 198; Labour government (1964-70), 20; as monetary union, 215; need for export sector support, 357, 364; return to gold standard (1920s), 76; Scottish independence referendum (2014), 218, 243–5, 248; trade deficits, 30, 321, 322, 329, 364; tradition of national branch banking, 116; see also Bank of England United Nations, 214–15 United States: 1914 financial crisis, 192–201, 206; Aldrich-Vreeland Act (1908), 196, 206; Bureau of War Risk Insurance (1914), 200; Constitution, 286; Dodd-Frank Reform (2010), 40, 260; dollar and gold link, 73, 195, 200–1; dollar as world’s reserve currency, 25, 28, 34; ‘double liability’ (1865-1934), 107–8; ‘free banking’ era, 60–2, 77, 161; Glass-Steagall Act (1933), 23, 98, 260; gold reserves, 74, 77; Gramm-Leach-Bliley Act (1999), 23, 98; history of money in, 57–8, 67, 68, 160–1, 187, 188, 212, 215; as monetary union, 212, 215, 234; need for export sector support, 357, 364; New York becomes world money centre, 194–5, 200–1; notes and coins in, 281; Office of the Comptroller of the Currency, 137, 206; trade deficits, 30, 34, 46, 49, 319, 321, 329, 364 Van Court’s Counterfeit Detector and Bank Note List, 61 Vietnam War, 5, 20, 73, 306 Viniar, David, 123 Volcker, Paul, 176, 288 Voltaire, 126 Wall Street Crash (1929), 347 Walpole, Horace, 369 Walras, Léon, 79 Washington, George, 286 Weatherstone, Sir Dennis, 136–7, 278 weights and measures, 212, 286, 287 Wheeler, Judge Thomas C., 162 wholesale funding, 97 Willetts, David, 83 Wilson, Brigadier-General Henry, 89 Wimbledon tennis championships, 142, 187–8 Wolf, Martin, 96, 262 World Bank, 21, 350 World Trade Organisation, 361 Yellen, Janet, 176, 287 Yugoslavia, break-up of, 216 Zimbabwe, 68, 69–70 ABOUT THE AUTHOR Mervyn King was Governor of the Bank of England from 2003 to 2013, and is currently Professor of Economics and Law at New York University and School Professor of Economics at the London School of Economics.


pages: 287 words: 80,050

The Wisdom of Frugality: Why Less Is More - More or Less by Emrys Westacott

Airbnb, back-to-the-land, Bertrand Russell: In Praise of Idleness, Bonfire of the Vanities, carbon footprint, clean water, Community Supported Agriculture, corporate raider, critique of consumerism, Daniel Kahneman / Amos Tversky, dark matter, Diane Coyle, discovery of DNA, Downton Abbey, dumpster diving, financial independence, full employment, greed is good, happiness index / gross national happiness, haute cuisine, hedonic treadmill, income inequality, invisible hand, Isaac Newton, loss aversion, McMansion, means of production, move fast and break things, move fast and break things, negative equity, New Urbanism, paradox of thrift, Ralph Waldo Emerson, salary depends on his not understanding it, sunk-cost fallacy, Thales and the olive presses, Thales of Miletus, the market place, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, Upton Sinclair, Veblen good, Zipcar

Like go to a store, do your Christmas or holiday shopping now, this weekend.2 And with the onset of a recession triggered by the 2008 financial crisis, Newsweek issued the same sort of call in 2009 under the headline “Stop Saving Now!” In our economy, in which 70 percent of activity is derived from consumers, we do need our neighbors to spend. Otherwise we fall into what economist John Maynard Keynes called the “paradox of thrift.” . . . It’s tempting in the period of contraction to mimic Thoreau, to live simply and deliberately. But if we lose our penchant for gain and risk, we’ll lose some of the essence of what makes us American.3 In addition to debt-financed consumption, capitalism also encourages and requires debt-financed enterprise.

See basic needs Newsweek, 165–66 Newton, Isaac, 93–94 Nietzsche, Friedrich, 32, 41, 60, 68, 74, 137, 156, 185–86 niggardliness, 193. See also parsimony Norquist, Grover, 234 nostalgia, 206, 212, 214–15; critique of, 213–14; for nature, 252; for simplicity, 206–15 Nussbaum, Martha, 149 Obama, Barack, 166 Ovid, 207–8 Owen, David, 259 paradox of thrift, 166 parsimony, 57, 143, 145, 189, 191–92, 193, 198 Paul (the apostle), 51 peace of mind, 100–107, 121, 284, 286. See also tranquillity Pickett, Kate, 151 Piff, Paul, 150 Plath, Sylvia, 118 Plato, 15, 28, 45, 51, 54, 56, 58, 63, 75–76, 91, 92, 101, 141, 143–44, 149–50, 156, 171, 186, 195–96, 287 pleasure, 58–60, 69–71, 75–76, 91, 102, 111–18, 135, 204; of novel experiences, 183, 188–89; sensual, 28–29.


pages: 438 words: 84,256

The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival by Charles Goodhart, Manoj Pradhan

asset-backed security, banks create money, Berlin Wall, bonus culture, Boris Johnson, Branko Milanovic, business cycle, capital controls, central bank independence, coronavirus, corporate governance, COVID-19, deglobalization, demographic dividend, demographic transition, Deng Xiaoping, en.wikipedia.org, Fall of the Berlin Wall, financial independence, financial repression, fixed income, full employment, gig economy, Gini coefficient, housing crisis, income inequality, inflation targeting, interest rate swap, job automation, Kickstarter, long term incentive plan, longitudinal study, low skilled workers, manufacturing employment, Martin Wolf, mass immigration, non-tariff barriers, offshore financial centre, oil shock, old age dependency ratio, open economy, paradox of thrift, Pearl River Delta, pension reform, price stability, private sector deleveraging, quantitative easing, rent control, savings glut, secular stagnation, shareholder value, special economic zone, The Great Moderation, The Wealth of Nations by Adam Smith, total factor productivity, working poor, working-age population, yield curve, zero-sum game

That would impair the asset side of the balance sheet of Japan’s pension funds, which would make it virtually impossible for them to service the liabilities that are due to the household sector. Shocked by the loss of future retirement income, households would raise their savings immediately and the ‘paradox of thrift’ would then lead to a consumption collapse and push Japan into a depression. Thus, the ‘leakage’ of Japan’s debt cancellation via household spending is just far too big. In China, both sides of leverage are on the same balance sheet (i.e. the government’s) since so much of the corporate debt in question was issued by state-owned banks to SOEs.

Oil Oil, price of Oil prices, dramatic fall in 2015 Oil price shock Oil price, variations in Old age dependency, increasing Old age, inevitable Old, a major voting bloc Old China Old, consume more services Older people, rising proportion of Oligomannate ‘The only game in town’ Opinion polls Orban, Viktor Outbound Foreign Direct Investment (FDI) Outlook, for health and pensions Output growth in Japan, in post-war decades Output per worker, growth in Japan Outsiders, in Japan Outsiders, in labour force Over-60s, rising proportion in population Over-80s, fastest growing segment of population Overseas capital investment ratio Overseas capital investment ratio, in Japan Overseas/domestic investment ratio Overseas FDI Overseas operations by Japanese corporates, not contributing to profits Oxford University Centre for Business Taxation P Paish, George Pakistan Papetti, A. Paradox of thrift Paris club, creditors’ debt sustainability Parisians, can take Metro Parkinson’s Parliament Participation Participation of elderly workers in Japan, highest Participation rate, inversely related to pension generosity Participation rate, negatively related to pension generosity Participation rate(s) Part-time workers, increasing proportion in Japan Patriotic nationalism Patterson, C.


pages: 263 words: 80,594

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Robert Solow", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, bond market vigilante , Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, housing crisis, Hyman Minsky, impact investing, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), job polarisation, Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low skilled workers, market clearing, means of production, Modern Monetary Theory, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Ponzi scheme, Post-Keynesian economics, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

Some, like Kenneth Rogoff, argue that slow growth and productivity are to be expected in the wake of a massive financial crisis.20 Households and businesses will all be attempting to deleverage at the same time, creating a Keynesian “paradox of thrift” — the kind of reverse economic multiplier caused when governments, households, or businesses cut their spending. This effect is exacerbated during what Richard Koo calls a “balance sheet recession”, caused by excessive lending. But others argue that the paradox of thrift can’t explain sluggish growth on its own, not least because the slow-down in growth rates appears to have preceded the financial crisis. In fact, the asset price inflation of the pre-crisis period and the large profits generated by the finance sector disguised a long-standing slowdown in other parts of the economy.


pages: 354 words: 92,470

Grave New World: The End of Globalization, the Return of History by Stephen D. King

9 dash line, Admiral Zheng, air freight, Albert Einstein, Asian financial crisis, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Sanders, bilateral investment treaty, bitcoin, blockchain, Bonfire of the Vanities, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collateralized debt obligation, colonial rule, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, debt deflation, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Snowden, eurozone crisis, facts on the ground, failed state, Fall of the Berlin Wall, falling living standards, floating exchange rates, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, global value chain, hydraulic fracturing, Hyman Minsky, imperial preference, income inequality, income per capita, incomplete markets, inflation targeting, information asymmetry, Internet of things, invisible hand, joint-stock company, Kickstarter, Long Term Capital Management, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, moral hazard, Nixon shock, offshore financial centre, oil shock, old age dependency ratio, paradox of thrift, Peace of Westphalia, Plutocrats, plutocrats, price stability, profit maximization, quantitative easing, race to the bottom, rent-seeking, reserve currency, reshoring, rising living standards, Ronald Reagan, Savings and loan crisis, Scramble for Africa, Second Machine Age, Skype, South China Sea, special drawing rights, technology bubble, The Great Moderation, The Market for Lemons, the market place, The Rise and Fall of American Growth, trade liberalization, trade route, Washington Consensus, WikiLeaks, Yom Kippur War, zero-sum game

One way to think about the post-crisis world is to recognize that, with high levels of debt, it makes sense for households, companies and governments individually to tackle those debts. If everyone repays debt at the same time, however, the result is likely to be a severe demand shortage. It is a reflection of John Maynard Keynes’ ‘paradox of thrift’: if there is an increase in savings (or repayment of debt) with no corresponding increase in investment, there is likely to be a downward economic multiplier that will leave resources unemployed and growth below par. To combat this, those countries that can more easily sustain their debts or reduce their savings should be encouraged to maintain – or even increase – their spending, even as others take a more austere path.

(i) Jolie, Angelina (i) Jordan (country) (i) Joyce, James (i) Juncker, Jean-Claude (i) Juncker Plan (i), (ii)n3 Junts pel Sí (i) Kaczińsky, Jarosław (i) Kaduna (i) Karbala, Battle of (i) Kazakhstan (i), (ii) Kennan, George (i) Keynes, John Maynard ‘animal spirits’ (i) bancor (i), (ii), (iii) Churchill and (i) demand management (i), (ii) IMF and (i) on fashion (i) on gold (i) ‘paradox of thrift’ (i) unemployment, inflation and (i) Kim, Dr Jim Yong (i) King, Mervyn (i)n12 Kirchner, Cristina Fernández de (i) Kirchner, Néstor (i) Kosmos (i) Korean War (i), (ii) Kunming (i) Kurds (i) Kuril Islands (i) Kuwait (i) Kyrgyzstan (i) Labour Party (UK) (i), (ii), (iii), (iv) Lagarde, Christine (i) Lagos (i) Latin America (i) balance of payments deficits (i) bringing inflation to heel (i) debt crises (i) immigrants enter US (i) income of (i) Law and Justice party (Poland) (i) Le Pen, Marine (i) League of Nations (i), (ii), (iii) Lebanon (i) Lee Kuan Yew (i) Lehman Brothers (i) Lenin, Vladimir Ilyich (i), (ii) Leopold II, King (Belgium) (i), (ii)n6 Leviathan (Thomas Hobbes) (i) Lewis, Arthur (i) Lewis Model (i) liberal democracy (i), (ii), (iii), (iv) Liberia (i) Libya (i), (ii) Lima (i) Lion King, The (Disney) (i) Lithuania (i) living standards Brazil (i) Italy (i) Mexico (i) New Zealand (i) Northern Europe and US (i) post-Second World War, industrialized countries (i) Soviet Union (i) under threat (i) US (i), (ii) various (i), (ii) West and parts of Asia (i) Western and Eastern Europe (i) Western Europe (i) Livingstone, David (i) Locke, John (i) London banker to the world (i) BBC Two and the power cut (i) clubs (i) financial centres (i) living standards (i) squalor to comfort in (i) London School of Economics (i) Long Term Capital Management (i) Long Term Credit Bank of Japan (i) Louvre (i) Love Thy Neighbour (i) Lucas, Robert (i) Luxembourg (i), (ii) Lydon, John (Johnny Rotten) (i) Maastricht Treaty (i), (ii) Macau (i), (ii) macroeconomics (i) Madagascar (i) Madrid (i) Magic Mountain, The (Thomas Mann) (i) malaria (i), (ii) Malaysia (i), (ii), (iii) Mali (i) Manchester Guardian (i) Manchuria (i), (ii) Manila (i) Mann, Katja (i) Mann, Thomas (i) Mansa Musa (i) Mao Zedong (i), (ii), (iii) Marshall, George (i), (ii) Marshall Plan (i), (ii), (iii), (iv) Marston Valley Brick Company (i), (ii) Marx, Karl (i), (ii), (iii), (iv), (v) Mary II, Queen (i) Massachusetts (i) Maxwell, Robert (i) May, Theresa (i) Mazzini, Giuseppe (i) McCarthy, Joe (i) McCloskey, Deirdre (i) Mecca (i) Mediterranean (i), (ii), (iii) Medvedev, Dmitry (i) Meiji Restoration (i), (ii) mercantilism (i) Mercia (i) Merkel, Angela (i), (ii) Mesopotamia (i) Mexico immigration into America (i) North American Free Trade Association (i), (ii) per capita incomes (i) tequila crisis (i) TPP (i) Trump and (i), (ii), (iii) US border (i) Mian, Atif (i) Microsoft (i) Middle East China’s trade routes (i) failure of liberal democracy (i), (ii) Islam on march (i) US failure to deliver peace (i) US inconsistency (i) US no longer reliant on (i) Milanović, Branko (i) military spending (i), (ii) Millennium Development Goal (i) Miller, Robert (i) Ming Dynasty (i) Minsky, Hyman (i), (ii), (iii)n12 Miss World (i) Mississippi (state) (i) Mitterrand, François (i), (ii) Mogadishu (i) Mohammad, Prophet (i), (ii), (iii) see also Islam Mohammad Mossadeq (i) Mohammad Reza Shah (i) Molotov–Ribbentrop Pact (i) Mombasa (i) Monaco (i) monetarism (i) Mongols (i), (ii), (iii) Montesquieu (i), (ii), (iii) Moore’s Law (i) Moors (i), (ii) Morgenthau, Hans (i), (ii), (iii), (iv)n1 Morsi, Mohammad (i) Moscow (i) Moscow Olympics (i) Mosul (i) ‘Moving to Opportunity’ (US Department of Housing and Urban Development) (i) Mubarak, Hosni (i) Mulan (Disney) (i) Mumbai (i) Muslim Brotherhood (i) Muslims see also Islam Constantinople falls (i) Nigerian clashes (i) Poland and (i) Trump and (i), (ii) UK immigrants (i) Mussolini, Benito (i) Myanmar (i) Nader Shah (i) Napoleonic Wars (i), (ii), (iii), (iv), (v) Nasser, Gamal Abdel (i) nation states (i) decision-making (i) economic logic and (i) ethnic and cultural tensions (i) EU differs from (i) Eurozone (i) globalization and (i), (ii), (iii), (iv) Mazzini on (i) Ottoman Empire (i) them and us (i) National Endowment for Democracy (i) National Health Service (NHS) (i) Native Americans (i) NATO (North Atlantic Treaty) (i), (ii), (iii), (iv) Nazis (i) Nelson, Admiral Lord (i) Netflix (i) Netherlands (i), (ii) New York (i), (ii), (iii), (iv), (v) New York Times (i) New Zealand (i), (ii), (iii) Nice (i) Nicholas II, Tsar (i) Nietzsche, Friedrich (i) Nigeria (i) Nile, River (i) Nineteen Eighty-Four (George Orwell) (i) Nixon, Richard (i) Nixon Shock (i), (ii), (iii) North Africa African trade (i) freedom statistics for (i) Islam reaches (i), (ii) liberal democracy absent (i), (ii) North American Free Trade Agreement (i), (ii) North Korea (i), (ii) Northern Ireland (i), (ii) Norway (i) Nye, Joseph (i) Obama, Barack Asian Infrastructure Investment Bank and (i) Duterte’s insult (i) Merkel and (i) ‘pivot to Asia’ (i), (ii), (iii) rejected for Trump (i) TPP (i) Oborne, Peter (i)n6 OECC (Organisation for European Economic Co-operation) (i), (ii) OECD (Organisation for Economic Co-operation and Development) (i), (ii), (iii)n18 Offa (i) Office of the US Trade Representative (i), (ii) oil 1970s (i) Iran threatens to nationalise (i) price collapses (i), (ii) US and Middle East (i) Oman (i) Oosterbeek (i) Open University (i) Orwell, George (i) Osman I (Ottomans) (i) Ottoman Empire (i) Constantinople falls (i) Crimean War (i) crumbles (i) Egypt in (i) First World War (i) independence from (i) origins of (i) Persia pushes back (i) Pacific (i), (ii), (iii), (iv) see also Trans-Pacific Partnership (TPP) PACOM (US Pacific Command) (i) Pakistan (i), (ii), (iii) Palestinian Authority (i) Pamir Mountains (i) Paracel Islands (i) Paranoid Style (i) Paris (i), (ii), (iii) Paris, Treaty of (1951) (i) Paris climate deal 2015 (i) Party for Freedom (Netherlands) (i) Pearl Harbor (i) per capita incomes China and India (i) China and US (i) Eastern Europe (i) Italy (i) Mexico (i) Nigeria (i) Northern Europe and US (i) Poland (i) UK (i) Ukraine (i) US (i), (ii) various (i) Permanent Court of Arbitration (The Hague) (i) Perón, Juan (i) Persia (i), (ii), (iii), (iv) see also Iran Peru (i) Peter the Great (i) petrodollar (i) see also dollar (US) Pew Research Center (i) Philadelphia (i) Philippines (i), (ii), (iii), (iv) Phytophthora infestans (potato blight) (i) Piketty, Thomas (i) Plaza Accord (i), (ii) Podemos (i) Poland a train route through (i) Coca-Cola (i) Germany post First World War and (i) post fall of Berlin Wall (i) Second Gulf War (i) Western Europe and (i) politicians (i) Poltava, Battle of (i) population ageing (i), (ii), (iii), (iv) population statistics (i) Africa (i) Black Death (i) China (i) EU (i) immigrants in New World (i) India (i) Ireland (i) Syria (i) United States (i), (ii) various (i) populism (i), (ii), (iii), (iv) Port Harcourt (i) Portugal (i), (ii), (iii), (iv) potatoes (i) Powell, Enoch (i) Pratas Islands (i) Princip, Gavrilo (i) Private Eye (i) protectionism (i), (ii), (iii), (iv), (v) Protestants (i) Prussia (i) Putin, Vladimir (i), (ii), (iii), (iv), (v) Al Qaeda (i), (ii)n2 Qing dynasty (i), (ii) quantitative easing (i), (ii), (iii), (iv), (v) Quran (i) Radicals (British political party) (i) railways (i), (ii), (iii) Raj (i) Randall, Alan (i) RBS (i) Reagan, Ronald (i), (ii), (iii), (iv), (v) Red Army (i) Red Feed (i) Reformation (i) refugees (i), (ii), (iii), (iv), (v), (vi) see also asylum seekers; immigration Regional Anti-Terrorist Structure (RATS) (i) Regional Comprehensive Economic Partnership (RCEP) (i), (ii) regulators (i) Reith, Lord (i) Remainers (i) Renesas Electronics (i) Republican Party (US) (i), (ii) Reputation Institute (i) reserve currencies competition for (i) Triffin Dilemma (i) US dollar (i), (ii), (iii), (iv) Revolutionary War (US) (i) Ricardo, David (i), (ii), (iii), (iv)n10 rich, the (i) rising sea levels (i) Robinson, James A.


pages: 414 words: 119,116

The Health Gap: The Challenge of an Unequal World by Michael Marmot

active measures, active transport: walking or cycling, Affordable Care Act / Obamacare, Atul Gawande, Bonfire of the Vanities, Broken windows theory, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, centre right, clean water, congestion charging, correlation does not imply causation, Doha Development Round, epigenetics, financial independence, future of work, Gini coefficient, Growth in a Time of Debt, illegal immigration, income inequality, Indoor air pollution, Kenneth Rogoff, Kibera, labour market flexibility, longitudinal study, lump of labour, Mahatma Gandhi, Mahbub ul Haq, meta-analysis, microcredit, New Urbanism, obamacare, paradox of thrift, race to the bottom, Rana Plaza, RAND corporation, road to serfdom, Simon Kuznets, Socratic dialogue, structural adjustment programs, the built environment, The Spirit Level, trickle-down economics, twin studies, urban planning, Washington Consensus, Winter of Discontent, working poor

Amplifying a little, expansionary austerians believe that imposing policies of austerity, reducing the annual deficit and paying down national debt will enhance the confidence of the private sector and restore economic growth. Keynesians are of the view that with demand depressed, households and businesses are reluctant to invest and consume – Keynes’s ‘paradox of thrift’. Government must step in and, despite high levels of public debt, spend to stimulate the economy – counter-cyclical investment. Paul Krugman, Nobel Prize-winning Keynesian, characterises expansionary austerianism as belief in the confidence fairies. Austerians sneer that the Keynesian solution to high debt is more debt.

., here Lewis, Michael, here Lexington, Kentucky, here libertarians, here, here life expectancy, here, here, here, here among Australian aboriginals, here disability-free, here, here and education, here, here, here, here in former communist states, here and mental health, here and national income, here US compared with Cuba, here Lithuania, here, here, here Liverpool, here, here, here ‘living wage’, here loans, low-interest, here lobbying, here Los Angeles, here ‘lump of labour’ hypothesis, here Lundberg, Ole, here lung cancer, here, here lung disease, here, here, here, here luxury travel, here Macao, here, here McDonald’s, here McMunn, Anne, here Macoumbi, Pascoual, here Madrid, indignados protests, here, here Maimonides, here malaria, here, here, here, here, here Malawi, here male adult mortality, here, here Mali, here, here Malmö, here, here Malta, here Manchester, here, here, here Maoris, here, here, here, here Marmot Review, see Fair Society, Healthy Lives marriage, here Marx, Karl, here maternal mortality, here, here, here maternity leave, paid, here Matsumoto, Scott, here Meaney, Michael, here Medicaid, here Mediterranean diet, here Mengele, Joseph, here mental health, here, here, here, here, here, here, here and access to green space, here and adverse childhood experience, here and austerity, here and fear of crime, here and job insecurity, here and unemployment, here meritocracy, here Mexico, here, here, here, here, here education and cash transfers, here, here Millennium Birth Cohort Study, here, here Minimum Income for Healthy Living, here, here, here Mitchell, Richard, here Modern Times, here Morris, Jerry, here, here Moser, Kath, here Mozambique, infant mortality, here Mullainathan, Sendhil, here Murphy, Kevin, here, here Muscatelli, Anton, here Mustard, Fraser, here Mwana Mwende project, here Nathanson, Vivienne, here Native Americans, here Navarro, Vicente, here NEETs, here, here neoliberalism, here, here, here, here, here Nepal, here, here Neruda, Pablo, here Netherlands, here, here New Guinea, here, here NEWS group, here, here Nietzsche, Friedrich, here, here Niger, here nitrogen dioxide, here, here non-human primates, here Nordic countries and commission report, here and social protection, here, here, here, here, here see also individual countries Norway, here, here, here, here, here, here life expectancy and education, here, here Nottingham, here Nozick, Robert, here obesity, here, here, here, here, here, here, here, here in children, here, here and diabetes, here and disincentives, here food corporations and, here genetic and environmental factors in, here and migrant studies, here and rational choice theory, here social gradient in, here, here, here, here in women, here, here Office of Budget Responsibility, here Olympic Games, here opera, here Organisation for Economic Co-operation and Development (OECD), here, here, here, here, here, here, here organisational justice, here Orwell, George, here Osler, Sir William, here Panorama, here Papua New Guinea, here ‘paradox of thrift’, here Paraguay, here, here, here parenting, here, here, here, here and work–life balance, here pay, low, here pensions, here, here, here, here Perkins, Charlie, here Peru, here, here, here physical activity and cognitive function, here green space and, here Pickett, Kate, here Pierson, Paul, here, here Piketty, Thomas, here, here, here, here Pinker, Steven, here Pinochet, General Augusto, here PISA scores, here, here, here, here, here Poland, here, here, here, here Popham, Frank, here Porgy and Bess, here poverty, here, here, here, here, here, here, here and aboriginal populations, here, here absolute and relative, here, here child poverty, here, here, here, here, here and choice, here and early childhood development, here, here effect on cognitive function, here and urban unrest, here and work, here Power, Chris, here pregnancy, here preventive health care, here ‘proportionate universalism’, here puberty, and smoking here public transport, here, here, here, here, here, here, here, here Ramazzini, Bernardino, here RAND Corporation, here, here, here rational choice theory, here, here, here rats, and brain development, here Rawls, John, here, here Reid, Donald, here Reinhart, Carmen, here, here reproduction, control over, here retirement, here reverse causation, here Reykjavik Zoo, here Rio de Janeiro, here, here Rogoff, Kenneth, here, here Rolling Stones, here Romania, here Romney, Mitt, here Rose, Geoffrey, here Roth, Philip, here Royal College of Physicians, here Royal Swedish Academy of Science, here Russia, here, here, here and alcohol use, here life expectancy, here, here, here, here Sachs, Jeffrey, here, here St Andrews, here San Diego, here Sandel, Michael, here, here Sapolsky, Robert, here Scottish Health Survey, here Seattle, here Self Employed Women’s Association (SEWA), here, here, here, here Sen, Amartya, here, here, here, here, here, here, here, here, here, here, here and Jean Drèze, here, here, here, here serotonin, here sexuality, here, here see also reproduction, control over sexually transmitted infections, here, here Shafir, Eldar, here Shakespeare, William, here, here, here, here Shanghai, here Shaw, George Bernard, here, here Shepherd, Jonathan, here shootings, here Siegrist, Johannes, here Sierra Leone, here, here, here Singapore, here, here Slovakia, here Slovenia, here, here smallpox vaccinations, here Smith, Adam, here Smith, Jim, here smoking, here, here, here, here, here, here, here, here declining rates of, here, here and education, here and public policy, here social gradient in, here, here and tobacco companies, here and unemployment, here Snowdon, Christopher, here social cohesion, here, here, here, here, here, here, here social mobility, here, here social protection, here ‘social rights’, here Social Science and Medicine, here Soundarya Cleaning Cooperative, here South Korea, here, here, here, here Spain, here, here, here Spectator, here sports sponsorship, here Sri Lanka, here Stafford, Mai, here Steptoe, Andrew, here Stiglitz, Joseph, here, here, here, here, here stroke, here, here, here structural adjustments, here, here Stuckler, David, here suicide, here, here, here, here, here and aboriginal populations, here, here and Indian cotton farmers, here and unemployment, here, here suicide, attempted, here Sulabh International, here Sun, here Sure Start programme, here Surinam, here Sutton, Willie, here Swansea, here Sweden, here, here, here, here, here, here, here life expectancy and education, here, here male adult mortality, here, here Swedish Commission on Equity in Health, here Syme, Leonard, here, here, here Taiwan, here, here Tanzania, here taxation, here Thailand, here Thatcher, Margaret, here Theorell, Tores, here tobacco companies, here Topel Robert, here Tottenham riots, here Tower Hamlets, here, here Townsend, Peter, here trade unions, here, here, here, here traffic calming measures, here Tressell, Robert, here ‘Triangle that Moves the Mountain’, here, here trickle-down economics, here, here Truman, Harry S., here tuberculosis, here, here, here, here Tunisia, here Turandot, here, here Turkey, here, here Uganda, here, here unemployment, here, here, here, here, here, here, here and mental health, here and suicide, here, here youth unemployment, here, here, here, here UNICEF, here, here United Kingdom alcohol consumption, here capital:income ratio, here and child well-being, here cost of childcare, here and economic recovery, here, here education system, here, here disability-free life expectancy, here founding of welfare state, here health-care system, here income inequalities, here, here literacy levels, here male adult mortality, here PISA score, here politics and economics, here and poverty in work, here, here poverty levels, here, here prison population, here social attitudes, here and social interventions, here social mobility, here ‘strivers and scroungers’ rhetoric, here, here and taxation, here unemployment, here use of tables for meals, here United Nations Development Programme (UNDP), here, here, here, here United States of America air pollution, here, here alcohol consumption, here capital:income ratio, here child poverty, here and child well-being, here cotton subsidies, here and economic recovery, here education system, here, here, here female life expectancy, here and gang violence, here health-care system, here, here income inequalities, here, here, here, here international comparisons, here, here, here lack of paid maternity leave, here life expectancy and education, here male adult mortality, here, here, here maternal mortality, here, here obesity levels, here, here, here, here PISA score, here politics and economics, here and poverty in work, here poverty levels, here prison population, here race and disadvantage, here, here, here, here, here social disadvantage and health, here social mobility, here suicide rate, here and taxation, here US Centers for Disease Control and Prevention, here US Department of Justice, here US Federal Reserve Bank, here US National Academy of Science (NAS), here, here, here, here University of Sydney, here urban planning, here Uruguay, here, here, here, here utilitarianism, here, here, here Vågerö, Denny, here valuation of life, here Victoria Longitudinal Study, here Vietnam, here, here violence, here domestic (intimate partner), here, here, here Virchow, Rudolf, here vulture funds, here, here Wales, youth unemployment in, here walking speed, here Washington Consensus, here, here, here welfare spending, here West Arnhem College, here Westminster, life expectancy in, here Whitehall Studies, here, here, here, here, here, here, here wife-beating, here Wilde, Oscar, here, here Wilkinson, Richard, here willingness-to-pay methodology, here, here Wolfe, Tom, here, here women and alcohol use, here and cash-transfer schemes, here A Note on the Author Born in England and educated in Australia, Sir Michael Marmot is Professor of Epidemiology and Public Health at UCL.


pages: 374 words: 113,126

The Great Economists: How Their Ideas Can Help Us Today by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, manufacturing employment, market bubble, means of production, mittelstand, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Since some income is saved while the rest is consumed, the gap between consumption and production must be filled by investment if full employment is to be maintained. Classical economists had assumed that savings automatically became investment. Keynes’s insight was to treat savings distinctly. He discovered the ‘paradox of thrift’ that arises when, as more people try to save, the aggregate amount of savings in an economy actually falls. This happens because, as savings increase, consumption falls, which reduces total output, which in turn reduces the income from which savings are made. The problem gets worse the richer societies become since wealthier people tend to save a higher fraction of their income.

He opposed the US central banking system, the Federal Reserve, which had been set up in 1913. Hayek disapproved of the Fed’s role in economic ups and downs. It was not just monetary policy. Hayek also disputed the use of fiscal policy in moderating business cycles. His work was an early attack on John Maynard Keynes’s hypothesis of excess saving or the paradox of thrift, discussed in Chapter 6. One of these articles, the ‘Paradox of Saving’, published in 1929, had caught the attention of Lionel Robbins, a young economist who had been recently appointed head of the Economics Department at the London School of Economics and Political Science (LSE). Hayek was the same age as Robbins.


pages: 573 words: 115,489

Prosperity Without Growth: Foundations for the Economy of Tomorrow by Tim Jackson

"Robert Solow", bank run, banking crisis, banks create money, Basel III, basic income, bonus culture, Boris Johnson, business cycle, carbon footprint, Carmen Reinhart, Cass Sunstein, choice architecture, collapse of Lehman Brothers, creative destruction, credit crunch, Credit Default Swap, critique of consumerism, David Graeber, decarbonisation, dematerialisation, en.wikipedia.org, energy security, financial deregulation, Financial Instability Hypothesis, financial intermediation, full employment, Garrett Hardin, Growth in a Time of Debt, Hans Rosling, Hyman Minsky, impact investing, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invisible hand, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, liberal capitalism, Mahatma Gandhi, mass immigration, means of production, meta-analysis, Money creation, moral hazard, mortgage debt, Naomi Klein, new economy, offshore financial centre, oil shale / tar sands, open economy, paradox of thrift, peak oil, peer-to-peer lending, Philip Mirowski, Post-Keynesian economics, profit motive, purchasing power parity, quantitative easing, Richard Thaler, road to serfdom, Robert Gordon, Ronald Reagan, science of happiness, secular stagnation, short selling, Simon Kuznets, Skype, smart grid, sovereign wealth fund, Steve Jobs, The Chicago School, The Great Moderation, The Rise and Fall of American Growth, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Tragedy of the Commons, universal basic income, Works Progress Administration, World Values Survey, zero-sum game

The human psyche sometimes finds a way to be considerably more circumspect than emerges from the picture in the previous chapter. The second interesting feature is that this unexpected reluctance to consume turns out to be a poor fit with the dynamics of growth. The economist John Maynard Keynes called this the ‘paradox of thrift’. These are circumstances where the normal rules of prudence are turned on their head. It’s entirely rational for each individual (or firm) to want to try and save a bit more in a crisis. But it turns out to be bad for growth – and ultimately bad for savings, too. Increased saving depresses high-street spending still further, deepening and lengthening the recession.

When things are working well, social structures are properly aligned with collective values and provide a cultural framework within which people can flourish, allowing us to live meaningful, purposive lives. When things go badly, institutional structures wage war on human values, undermining prosperity and damaging society. This, I would argue, is precisely where we find ourselves. It explains the restless dissatisfactions of consumerism. It makes sense of the paradoxes of thrift and materialism. It motivates the rise of a value-led anti-consumerism. And it draws support from a long succession of insights into the human condition from religion, from philosophers, from wisdom traditions, from poetry, from literature and from art: we are not and never were entirely the selfish hedonists that conventional economics expects and needs us to be.


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

If exports create jobs, then imports destroy them. It is hardly a virtue if one can only obtain it by forcing someone else to be a sinner—if one’s actions inevitably lead to problems in some other country. Modern economics, beginning with Keynes, has explained that in a world of unemployment there is the paradox of thrift. If everyone tries to save more, but investment is fixed, all that happens is that incomes fall. Ironically, total savings is not increased. The reasoning is simple: In equilibrium, savings must equal investment. Thus, if investment does not change, savings cannot change. If individuals insist, say, on saving a higher fraction of their income, the only way that the level of savings can be changed is if the level of income is reduced.

., 51–57 single currency and, 45–46 economic rents, 226, 280 economics, politics and, 308–18 economic security, 68 economies of scale, 12, 39, 55, 138 economists, poor forecasting by, 307 education, 20, 76, 344 investment in, 40, 69, 137, 186, 211, 217, 251, 255, 300 electricity, 217 electronic currency, 298–99, 389 electronics payment mechanism, 274–76, 283–84 emigration, 4, 68–69 see also migration employment: central banks and, 8, 94, 97 structural reforms and, 257–60 see also unemployment Employment Act (1946), 148 energy subsidies, 197 Enlightenment, 3, 318–19 environment, 41, 257, 260, 323 equality, 225–26 equilibrium, xviii–xix Erasmus program, 45 Estonia, 90, 331, 346 euro, xiv, 325 adjustments impeded by, 13–14 case for, 35–39 creation of, xii, 5–6, 7, 10, 333 creation of institutions required by, 10–11 divergence and, see divergence divorce of, 272–95, 307 economic integration and, 46–47, 268 as entailing fixed exchange rate, 8, 42–43, 46–47, 86–87, 92, 93, 94, 102, 105, 143, 193, 215–16, 240, 244, 249, 252, 254, 286, 297 as entailing single interest rate, 8, 85–88, 92, 93, 94, 105, 129, 152, 240, 244, 249 and European identification, 38–39 financial instability caused by, 131–32 growth promised by, 235 growth slowed by, 73 hopes for, 34 inequality increased by, xviii interest rates lowered by, 235 internal devaluation of, see internal devaluation literature on, 327–28 as means to end, xix peace and, 38 proponents of, 13 referenda on, 58, 339–40 reforms needed for, xii–xiii, 28–31 risk of, 49–50 weakness of, 224 see also flexible euro Eurobond, 356 euro crisis, xiii, 3, 4, 9 catastrophic consequences of, 11–12 euro-euphoria, 116–17 Europe, 151 free trade area in, 44–45 growth rates in, 63–64, 69, 73–74, 74, 75, 163 military conflicts in, 196 social models of, 21 European Central Bank (ECB), 7, 17, 80, 112–13, 117, 144, 145–73, 274, 313, 362, 368, 380 capture of, 158–59 confidence in, 200–201 corporate bonds bought by, 141 creation of, 8, 85 democratic deficit and, 26, 27 excessive expansion controlled by, 250 flexibility of, 269 funds to Greece cut off by, 59 German challenges to, 117, 164 governance and, 157–63 inequality created by, 154–55 inflation controlled by, 8, 25, 97, 106, 115, 145, 146–50, 151, 163, 165, 169–70, 172, 250, 256, 266 interest rates set by, 85–86, 152, 249, 302, 348 Ireland forced to socialize losses by, 134, 156, 165 new mandate needed by, 256 as political institution, 160–62 political nature of, 153–56 quantitative easing opposed by, 151 quantitative easing undertaken by, 164, 165–66, 170, 171 regulations by, 249, 250 unemployment and, 163 as unrepresentative, 163 European Commission, 17, 58, 161, 313, 332 European Court of Human Rights, 45 European Economic Community (EEC), 6 European Exchange Rate Mechanism (ERM), 30, 335 European Exchange Rate Mechanism II (ERM II), 336 European Free Trade Association, 44 European Free Trade Association Court, 44 European Investment Bank (EIB), 137, 247, 255, 301 European Regional Development Fund, 243 European Stability Mechanism, 23, 246, 357 European Union: budget of, 8, 45, 91 creation of, 4 debt and deficit limits in, 87–88 democratic deficit in, 26–27 economic growth in, 215 GDP of, xiii and lower rates of war, 196 migration in, 90 proposed exit of UK from, 4 stereotypes in, 12 subsidiarity in, 8, 41–42, 263 taxes in, 8, 261 Euro Summit Statement, 373 eurozone: austerity in, see austerity banking union in, see banking union counterfactual in, 235–36 double-dip recessions in, 234–35 Draghi’s speech and, 145 economic integration and, xiv–xx, 23, 39–50, 51–57 as flawed at birth, 7–9 framework for stability of, 244–52 German departure from, 32, 292–93 Greece’s possible exit from, 124 hours worked in, 71–72 lack of fiscal policy in, 152 and move to political integration, xvi, 34, 35, 51–57 Mundell’s work on dangers of, 87 policies of, 15–17 possible breakup of, 29–30 privatization avoided in, 194 saving, 323–26 stagnant GDP in, 12, 65–68, 66, 67 structure of, 8–9 surpluses in, 120–22 theory of, 95–97 unemployment in, 71, 135, 163, 177–78, 181, 331 working-age population of, 70 eurozone, proposed structural reforms for, 239–71 common financial system, see banking union excessive fiscal responsibility, 163 exchange-rate risks, 13, 47, 48, 49–50, 125, 235 exchange rates, 80, 85, 288, 300, 338, 382, 389 of China, 251, 254, 350–51 and competitive devaluation, 105–6 after departure of northern countries, 292–93 of euro, 8, 42–43, 46–47, 86–87, 92, 93, 94, 102, 105, 215–16, 240, 244, 249, 252, 254, 286, 297 flexible, 50, 248, 349 and full employment, 94 of Germany, 254–55, 351 gold and, 344–45 imports and, 86 interest rates and, 86 quantitative easing’s lowering of, 151 real, 105–6 and single currencies, 8, 42–43, 46–47, 86–87, 92, 93, 94, 97–98 stabilizing, 299–301 and trade deficits, 107, 118 expansionary contractions, 95–96, 208–9 exports, 86, 88, 97–99, 98 disappointing performance of, 103–5 external imbalances, 97–98, 101, 109 externalities, 42–43, 121, 153, 301–2 surpluses as, 253 extremism, xx, 4 Fannie Mae, 91 farmers, US, in deflation, xii Federal Deposit Insurance Corporation (FDIC), 91 Federal Reserve, US, 349 alleged independence of, 157 interest rates lowered by, 150 mandate of, 8, 147, 172 money pumped into economy by, 278 quantitative easing used by, 151, 170 reform of, 146 fiat currency, 148, 275 and taxes, 284 financial markets: lobbyists from, 132 reform of, 214, 228–29 short-sighted, 112–13 financial systems: necessity of, xix real economy of, 149 reform of, 257–58 regulations needed by, xix financial transaction system, 275–76 Finland, 16, 81, 122, 126, 292, 296, 331, 343 growth in, 296–97 growth rate of, 75, 76, 234–35 fire departments, 41 firms, 138, 186–87, 245, 248 fiscal balance: and cutting spending, 196–98 tax revenue and, 190–96 Fiscal Compact, 141, 357 fiscal consolidation, 310 fiscal deficits, see deficits, fiscal fiscal policy, 148, 245, 264 in center of macro-stabilization, 251 countercyclical, 244 in EU, 8 expansionary, 254–55 stabilization of, 250–52 fiscal prudence, 15 fiscal responsibility, 163 flexibility, 262–63, 269 flexible euro, 30–31, 272, 296–305, 307 cooperation needed for, 304–5 food prices, 169 forbearance, 130–31 forecasts, 307 foreclosure proposal, 180 foreign ownership, privatization and, 195 forestry, 81 France, 6, 14, 16, 114, 120, 141, 181–82, 331, 339–40, 343 banks of, 202, 203, 231, 373 corporate income tax in, 189–90 euro creation regretted in, 340 European Constitution referendum of, 58 extreme right in, xi growth in, 247 Freddie Mac, 91 Freefall (Stiglitz), 264, 335 free mobility of labor, xiv, 26, 40, 125, 134–36, 142–44, 242 Friedman, Milton, 151, 152–53, 167, 339 full employment, 94–97, 379 G-20, 121 gas: import of, 230 from Russia, 37, 81, 93 Gates Foundation, 276 GDP-indexed bonds, 267 German bonds, 114, 323 German Council of Economic Experts, 179, 365 Germany, xxi, 14, 30, 65, 108, 114, 141, 181–82, 207, 220, 286, 307, 331, 343, 346, 374 austerity pushed by, 186, 232 banks of, 202, 203, 231–32, 373 costs to taxpayers of, 184 as creditor, 140, 187, 267 debt collection by, 117 debt in, 105 and debt restructuring, 205, 311 in departure from eurozone, 32, 292–93 as dependent on Russian gas, 37 desire to leave eurozone, 314 ECB criticized by, 164 EU economic practices controlled by, 17 euro creation regretted in, 340 exchange rate of, 254–55, 351 failure of, 13, 78–79 flexible exchange of, 304 GDP of, xviii, 92 in Great Depression, 187 growing poverty in, 79 growth of, 78, 106, 247 hours worked per worker in, 72 inequality in, 79, 333 inflation in, 42, 338, 358 internal solidarity of, 334 lack of alternative to euro seen by, 11 migrants to, 320–21, 334–35, 393 minimum wage in, 42, 120, 254 neoliberalism in, 10 and place-based debt, 136 productivity in, 71 programs designed by, 53, 60, 61, 202, 336, 338 reparations paid by, 187 reunification of, 6 rules as important to, 57, 241–42, 262 share of global employment in, 224 shrinking working-age population of, 70, 78–79 and Stability and Growth Pact, 245 and structural reforms, 19–20 “there is no alternative” and, 306, 311–12 trade surplus of, 117, 118–19, 120, 139, 253, 293, 299, 350–52, 381–82, 391 “transfer union” rejected by, 22 US loans to, 187 victims blamed by, 9, 15–17, 177–78, 309 wages constrained by, 41, 42–43 wages lowered in, 105, 333 global financial crisis, xi, xiii–xiv, 3, 12, 17, 24, 67, 73, 75, 114, 124, 146, 148, 274, 364, 387 and central bank independence, 157–58 and confidence, 280 and cost of failure of financial institutions, 131 lessons of, 249 monetary policy in, 151 and need for structural reform, 214 originating in US, 65, 68, 79–80, 112, 128, 296, 302 globalization, 51, 321–23 and diminishing share of employment in advanced countries, 224 economic vs. political, xvii failures of, xvii Globalization and Its Discontents (Stig-litz), 234, 335, 369 global savings glut, 257 global secular stagnation, 120 global warming, 229–30, 251, 282, 319 gold, 257, 275, 277, 345 Goldman Sachs, 158, 366 gold standard, 148, 291, 347, 358 in Great Depression, xii, 100 goods: free movement of, 40, 143, 260–61 nontraded, 102, 103, 169, 213, 217, 359 traded, 102, 103, 216 Gordon, Robert, 251 governance, 157–63, 258–59 government spending, trade deficits and, 107–8 gravity principle, 124, 127–28 Great Depression, 42, 67, 105, 148, 149, 168, 313 Friedman on causes of, 151 gold standard in, xii, 100 Great Malaise, 264 Greece, 14, 30, 41, 64, 81, 100, 117, 123, 142, 160, 177, 265–66, 278, 307, 331, 343, 366, 367–68, 374–75, 386 austerity opposed by, 59, 60–62, 69–70, 207–8, 392 balance of payments, 219 banks in, 200–201, 228–29, 231, 270, 276, 367, 368 blaming of, 16, 17 bread in, 218, 230 capital controls in, 390 consumption tax and, 193–94 counterfactual scenario of, 80 current account surplus of, 287–88 and debt restructuring, 205–7 debt-to-GDP ratio of, 231 debt write-offs in, 291 decline in labor costs in, 56, 103 ECB’s cutting of funds to, 59 economic growth in, 215, 247 emigration from, 68–69 fiscal deficits in, 16, 186, 215, 233, 285–86, 289 GDP of, xviii, 183, 309 hours worked per worker in, 72 inequality in, 72 inherited debt in, 134 lack of faith in democracy in, 312–13 living standards in, 216 loans in, 127 loans to, 310 migrants and, 320–21 milk in, 218, 223, 230 new currency in, 291, 300 oligarchs in, 16, 227 output per working-age person in, 70–71 past downturns in, 235–36 pensions in, 16, 78, 188, 197–98, 226 pharmacies in, 218–20 population decline in, 69, 89 possible exit from eurozone of, 124, 197, 273, 274, 275 poverty in, 226, 261, 376 primary surplus of, 187–88, 312 privatization in, 55, 195–96 productivity in, 71, 342 programs imposed on, xv, 21, 27, 60–62, 140, 155–56, 179–80, 181, 182–83, 184–85, 187–88, 190–93, 195–96, 197–98, 202–3, 205, 206, 214–16, 218–23, 225–28, 229, 230, 231, 233–34, 273, 278, 308, 309–11, 312, 315–16, 336, 338 renewable energy in, 193, 229 social capital destroyed in, 78 sovereign spread of, 200 spread in, 332 and structural reforms, 20, 70, 188, 191 tax revenue in, 16, 142, 192, 227, 367–368 tools lacking for recovery of, 246 tourism in, 192, 286 trade deficits in, 81, 194, 216–17, 222, 285–86 unemployment in, xi, 71, 236, 267, 332, 338, 342 urgency in, 214–15 victim-blaming of, 309–11 wages in, 216–17 youth unemployment in, xi, 332 Greek bonds, 116, 126 interest rates on, 4, 114, 181–82, 201–2, 323 restructuring of, 206–7 green investments, 260 Greenspan, Alan, 251, 359, 363 Grexit, see Greece, possible exit from eurozone of grocery stores, 219 gross domestic product (GDP), xvii decline in, 3 measurement of, 341 Growth and Stability Pact, 87 hedge funds, 282, 363 highways, 41 Hitler, Adolf, 338, 358 Hochtief, 367–68 Hoover, Herbert, 18, 95 human capital, 78, 137 human rights, 44–45, 319 Hungary, 46, 331, 338 hysteresis, 270 Iceland, 44, 111, 307, 354–55 banks in, 91 capital controls in, 390 ideology, 308–9, 315–18 imports, 86, 88, 97–99, 98, 107 incentives, 158–59 inclusive capitalism, 317 income, unemployment and, 77 income tax, 45 Independent Commission for the Reform of International Corporate Taxation, 376–377 Indonesia, 113, 230–31, 314, 350, 364, 378 industrial policies, 138–39, 301 and restructuring, 217, 221, 223–25 Industrial Revolution, 3, 224 industry, 89 inequality, 45, 72–73, 333 aggregate demand lowered by, 212 created by central banks, 154 ECB’s creation of, 154–55 economic performance affected by, xvii euro’s increasing of, xviii growth’s lowering of, 212 hurt by collective action, 338 increased by neoliberalism, xviii increase in, 64, 154–55 inequality in, 72, 212 as moral issue, xviii in Spain, 72, 212, 225–26 and tax harmonization, 260–61 and tax system, 191 inflation, 277, 290, 314, 388 in aftermath of tech bubble, 251 bonds and, 161 central banks and, 153, 166–67 consequences of fixation on, 149–50, 151 costs of, 270 and debt monetization, 42 ECB and, 8, 25, 97, 106, 115, 145, 146–50, 151, 163, 165, 169–70, 172, 255, 256, 266 and food prices, 169 in Germany, 42, 338, 358 interest rates and, 43–44 in late 1970s, 168 and natural rate hypothesis, 172–73 political decisions and, 146 inflation targeting, 157, 168–70, 364 information, 335 informational capital, 77 infrastructure, xvi–xvii, 47, 137, 186, 211, 255, 258, 265, 268, 300 inheritance tax, 368 inherited debt, 134 innovation, 138 innovation economy, 317–18 inputs, 217 instability, xix institutions, 93, 247 poorly designed, 163–64 insurance, 355–356 deposit, see deposit insurance mutual, 247 unemployment, 91, 186, 246, 247–48 integration, 322 interest rates, 43–44, 86, 282, 345, 354 in aftermath of tech bubble, 251 ECB’s determination of, 85–86, 152, 249, 302, 348 and employment, 94 euro’s lowering of, 235 Fed’s lowering of, 150 on German bonds, 114 on Greek bonds, 4, 114, 181–82 on Italian bonds, 114 in late 1970s, 168 long-term, 151, 200 negative, 316, 348–49 quantitative easing and, 151, 170 short-term, 249 single, eurozone’s entailing of, 8, 85–88, 92, 93, 94, 105, 129, 152, 240, 244, 249 on Spanish bonds, 114, 199 spread in, 332 stock prices increased by, 264 at zero lower bound, 106 intermediation, 258 internal devaluation, 98–109, 122, 126, 220, 255, 388 supply-side effects of, 99, 103–4 International Commission on the Measurement of Economic Performance and Social Progress, 79, 341 International Labor Organization, 56 International Monetary Fund (IMF), xv, xvii, 10, 17, 18, 55, 61, 65–66, 96, 111, 112–13, 115–16, 119, 154, 234, 289, 309, 316, 337, 349, 350, 370, 371, 381 and Argentine debt, 206 conditions of, 201 creation of, 105 danger of high taxation warnings of, 190 debt reduction pushed by, 95 and debt restructuring, 205, 311 and failure to restore credit, 201 global imbalances discussed by, 252 and Greek debts, 205, 206, 310–11 on Greek surplus, 188 and Indonesian crisis, 230–31, 364 on inequality’s lowering of growth, 212–13 Ireland’s socialization of losses opposed by, 156–57 mistakes admitted by, 262, 312 on New Mediocre, 264 Portuguese bailout of, 178–79 tax measures of, 185 investment, 76–77, 111, 189, 217, 251, 264, 278, 367 confidence and, 94 divergence in, 136–38 in education, 137, 186, 211, 217, 251, 255, 300 infrastructure in, xvi–xvii, 47, 137, 186, 211, 255, 258, 265, 268, 300 lowered by disintermediation, 258 public, 99 real estate, 199 in renewable energy, 229–30 return on, 186, 245 stimulation of, 94 in technology, 137, 138–39, 186, 211, 217, 251, 258, 265, 300 investor state dispute settlement (ISDS), 393–94 invisible hand, xviii Iraq, refugees from, 320 Iraq War, 36, 37 Ireland, 14, 16, 44, 113, 114–15, 122, 178, 234, 296, 312, 331, 339–40, 343, 362 austerity opposed in, 207 debt of, 196 emigrants from, 68–69 GDP of, 18, 231 growth in, 64, 231, 247, 340 inherited debt in, 134 losses socialized in, 134, 156–57, 165 low debt in, 88 real estate bubble in, 108, 114–15, 126 surplus in, 17, 88 taxes in, 142–43, 376 trade deficits in, 119 unemployment in, 178 irrational exuberance, 14, 114, 116–17, 149, 334, 359 ISIS, 319 Italian bonds, 114, 165, 323 Italy, 6, 14, 16, 120, 125, 331, 343 austerity opposed in, 59 GDP per capita in, 352 growth in, 247 sovereign spread of, 200 Japan, 151, 333, 342 bubble in, 359 debt of, 202 growth in, 78 quantitative easing used by, 151, 359 shrinking working-age population of, 70 Java, unemployment on, 230 jobs gap, 120 Juncker, Jean-Claude, 228 Keynes, John Maynard, 118, 120, 172, 187, 351 convergence policy suggested by, 254 Keynesian economics, 64, 95, 108, 153, 253 King, Mervyn, 390 knowledge, 137, 138–39, 337–38 Kohl, Helmut, 6–7, 337 krona, 287 labor, marginal product of, 356 labor laws, 75 labor markets, 9, 74 friction in, 336 reforms of, 214, 221 labor movement, 26, 40, 125, 134–36, 320 austerity and, 140 capital flows and, 135 see also migration labor rights, 56 Lamers, Karl, 314 Lancaster, Kelvin, 27 land tax, 191 Latin America, 10, 55, 95, 112, 202 lost decade in, 168 Latvia, 331, 346 GDP of, 92 law of diminishing returns, 40 learning by doing, 77 Lehman Brothers, 182 lender of last resort, 85, 362, 368 lending, 280, 380 discriminatory, 283 predatory, 274, 310 lending rates, 278 leverage, 102 Lichtenstein, 44 Lipsey, Richard, 27 liquidity, 201, 264, 278, 354 ECB’s expansion of, 256 lira, 14 Lithuania, 331 living standards, 68–70 loans: contraction of, 126–27, 246 nonperforming, 241 for small and medium-size businesses, 246–47 lobbyists, from financial sector, 132 location, 76 London interbank lending rate (LIBOR), 131, 355 Long-Term Refinancing Operation, 360–361 Lucas, Robert, xi Luxembourg, 6, 94, 142–43, 331, 343 as tax avoidance center, 228, 261 luxury cars, 265 Maastricht Treaty, xiii, 6, 87, 115, 146, 244, 298, 339, 340 macro-prudential regulations, 249 Malta, 331, 340 manufacturing, 89, 223–24 market failures, 48–49, 86, 148, 149, 335 rigidities, 101 tax policy’s correction of, 193 market fundamentalism, see neoliberalism market irrationality, 110, 125–26, 149 markets, limitations of, 10 Meade, James, 27 Medicaid, 91 medical care, 196 Medicare, 90, 91 Mellon, Andrew, 95 Memorandum of Agreement, 233–34 Merkel, Angela, 186 Mexico, 202, 369 bailout of, 113 in NAFTA, xiv Middle East, 321 migrant crisis, 44 migration, 26, 40, 68–69, 90, 125, 320–21, 334–35, 342, 356, 393 unemployment and, 69, 90, 135, 140 see also labor movement military power, 36–37 milk, 218, 223, 230 minimum wage, 42, 120, 254, 255, 351 mining, 257 Mississippi, GDP of, 92 Mitsotakis, Constantine, 377–78 Mitsotakis, Kyriakos, 377–78 Mitterrand, François, 6–7 monetarism, 167–68, 169, 364 monetary policy, 24, 85–86, 148, 264, 325, 345, 364 as allegedly technocratic, 146, 161–62 conservative theory of, 151, 153 in early 1980s US, 168, 210 flexibility of, 244 in global financial crisis, 151 political nature of, 146, 153–54 recent developments in theory of, 166–73 see also interest rates monetary union, see single currencies money laundering, 354 monopolists, privatization and, 194 moral hazard, 202, 203 mortgage rates, 170 mortgages, 302 multinational chains, 219 multinational development banks, 137 multinationals, 127, 223, 376 multipliers, 211–12, 248 balanced-budget, 188–90, 265 Mundell, Robert, 87 mutual insurance, 247 mutualization of debt, 242–43, 263 national development banks, 137–38 natural monopolies, 55 natural rate hypothesis, 172 negative shocks, 248 neoliberalism, xvi, 24–26, 33, 34, 98–99, 109, 257, 265, 332–33, 335, 354 on bubbles, 381 and capital flows, 28 and central bank independence, 162–63 in Germany, 10 inequality increased by, xviii low inflation desired by, 147 recent scholarship against, 24 Netherlands, 6, 44, 292, 331, 339–40, 343 European Constitution referendum of, 58 New Democracy Party, Greek, 61, 185, 377–78 New Mediocre, 264 New World, 148 New Zealand, 364 Nokia, 81, 234, 297 nonaccelerating inflation rate of unemployment (NAIRU), 379–80 nonaccelerating wage rate of unemployment (NAWRU), 379–80 nongovernmental organizations (NGOs), 276 nonperforming loans, 241 nontraded goods sector, 102, 103, 169, 213, 217, 359 North American Free Trade Agreement (NAFTA), xiv North Atlantic Treaty Organization (NATO), 196 Norway, 12, 44, 307 referendum on joining EU, 58 nuclear deterrence, 38 Obama, Barack, 319 oil, import of, 230 oil firms, 36 oil prices, 89, 168, 259, 359 oligarchs: in Greece, 16, 227 in Russia, 280 optimal currency area, 345 output, 70–71, 111 after recessions, 76 Outright Monetary Transactions program, 361 overregulate, 132 Oxfam, 72 panic of 1907, 147 Papandreou, Andreas, 366 Papandreou, George, xiv, 60–61, 184, 185, 220, 221, 226–27, 309, 312, 366, 373 reform of banks suggested by, 229 paradox of thrift, 120 peace, 34 pensions, 9, 16, 78, 177, 188, 197–98, 226, 276, 370 People’s Party, Portugal, 392 periphery, 14, 32, 171, 200, 296, 301, 318 see also specific countries peseta, 14 pharmacies, 218–20 Phishing for Phools (Akerlof and Shiller), 132 physical capital, 77–78 Pinochet, Augusto, 152–53 place-based debt, 134, 242 Pleios, George, 377 Poland, 46, 333, 339 assistance to, 243 in Iraq War, 37 police, 41 political integration, xvi, 34, 35 economic integration vs., 51–57 politics, economics and, 308–18 pollution, 260 populism, xx Portugal, 14, 16, 64, 177, 178, 331, 343, 346 austerity opposed by, 59, 207–8, 315, 332, 392 GDP of, 92 IMF bailout of, 178–79 loans in, 127 poverty in, 261 sovereign spread of, 200 Portuguese bonds, 179 POSCO, 55 pound, 287, 335, 346 poverty, 72 in Greece, 226, 261 in Portugal, 261 in Spain, 261 predatory lending, 274, 310 present discount value, 343 Price of Inequality, The (Stiglitz), 154 prices, 19, 24 adjustment of, 48, 338, 361 price stability, 161 primary deficit, 188, 389 primary surpluses, 187–88 private austerity, 126–27, 241–42 private sector involvement, 113 privatization, 55, 194–96, 369 production costs, 39, 43, 50 production function, 343 productivity, 71, 332, 348 in manufacturing, 223–24 after recessions, 76–77 programs, 17–18 Germany’s design of, 53, 60, 61, 187–88, 205, 336, 338 imposed on Greece, xv, 21, 27, 60–62, 140, 155–56, 179–80, 181, 182–83, 184–85, 187–88, 190–93, 195–96, 197–98, 202–3, 205, 206, 214–16, 218–23, 225–28, 229, 230, 231, 233–34, 273, 278, 308, 309–11, 312, 315–16, 336, 338 of Troika, 17–18, 21, 155–57, 179–80, 181, 182–83, 184–85, 187–93, 196, 202, 205, 207, 208, 214–16, 217, 218–23, 225–28, 229, 231, 233–34, 273, 278, 308, 309–11, 312, 313, 314, 315–16, 323–24, 346, 366, 379, 392 progressive automatic stabilizers, 244 progressive taxes, 248 property rights, 24 property taxes, 192–93, 227 public entities, 195 public goods, 40, 337–38 quantitative easing (QE), 151, 164, 165–66, 170–72, 264, 359, 361, 386 railroads, 55 Reagan, Ronald, 168, 209 real estate bubble, 25, 108, 109, 111, 114–15, 126, 148, 172, 250, 301, 302 cause of, 198 real estate investment, 199 real exchange rate, 105–6, 215–16 recessions, recovery from, 94–95 recovery, 76 reform, 75 theories of, 27–28 regulations, 24, 149, 152, 162, 250, 354, 355–356, 378 and Bush administration, 250–51 common, 241 corporate opposition to, xvi difficulties in, 132–33 of finance, xix forbearance on, 130–31 importance of, 152–53 macro-prudential, 249 in race to bottom, 131–34 Reinhardt, Carmen, 210 renewable energy, 193, 229–30 Republican Party, US, 319 research and development (R&D), 77, 138, 217, 251, 317–18 Ricardo, David, 40, 41 risk, 104, 153, 285 excessive, 250 risk markets, 27 Rogoff, Kenneth, 210 Romania, 46, 331, 338 Royal Bank of Scotland, 355 rules, 57, 241–42, 262, 296 Russia, 36, 264, 296 containment of, 318 economic rents in, 280 gas from, 37, 81, 93, 378 safety nets, 99, 141, 223 Samaras, Antonis, 61, 309, 377 savings, 120 global, 257 savings and loan crisis, 360 Schäuble, Wolfgang, 57, 220, 314, 317 Schengen area, 44 schools, 41, 196 Schröeder, Gerhard, 254 self-regulation, 131, 159 service sector, 224 shadow banking system, 133 shareholder capitalism, 21 Shiller, Rob, 132, 359 shipping taxes, 227, 228 short-termism, 77, 258–59 Silicon Valley, 224 silver, 275, 277 single currencies: conflicts and, 38 as entailing fixed exchange rates, 8, 42–43, 46–47, 86–87, 92, 93, 94, 97–98 external imbalances and, 97–98 and financial crises, 110–18 integration and, 45–46, 50 interest rates and, 8, 86, 87–88, 92, 93, 94 Mundell’s work on, 87 requirements for, 5, 52–53, 88–89, 92–94, 97–98 and similarities among countries, 15 trade integration vs., 393 in US, 35, 36, 88, 89–92 see also euro single-market principle, 125–26, 231 skilled workers, 134–35 skills, 77 Slovakia, 331 Slovenia, 331 small and medium-sized enterprises (SMEs), 127, 138, 171, 229 small and medium-size lending facility, 246–47, 300, 301, 382 Small Business Administration, 246 small businesses, 153 Smith, Adam, xviii, 24, 39–40, 41 social cohesion, 22 Social Democratic Party, Portugal, 392 social program, 196 Social Security, 90, 91 social solidarity, xix societal capital, 77–78 solar energy, 193, 229 solidarity fund, 373 solidarity fund for stabilization, 244, 254, 264, 301 Soros, George, 390 South Dakota, 90, 346 South Korea, 55 bailout of, 113 sovereign risk, 14, 353 sovereign spreads, 200 sovereign wealth funds, 258 Soviet Union, 10 Spain, 14, 16, 114, 177, 178, 278, 331, 335, 343 austerity opposed by, 59, 207–8, 315 bank bailout of, 179, 199–200, 206 banks in, 23, 186, 199, 200, 242, 270, 354 debt of, 196 debt-to-GDP ratio of, 231 deficits of, 109 economic growth in, 215, 231, 247 gold supply in, 277 independence movement in, xi inequality in, 72, 212, 225–26 inherited debt in, 134 labor reforms proposed for, 155 loans in, 127 low debt in, 87 poverty in, 261 real estate bubble in, 25, 108, 109, 114–15, 126, 198, 301, 302 regional independence demanded in, 307 renewable energy in, 229 sovereign spread of, 200 spread in, 332 structural reform in, 70 surplus in, 17, 88 threat of breakup of, 270 trade deficits in, 81, 119 unemployment in, 63, 161, 231, 235, 332, 338 Spanish bonds, 114, 199, 200 spending, cutting, 196–98 spread, 332 stability, 147, 172, 261, 301, 364 automatic, 244 bubble and, 264 central banks and, 8 as collective action problem, 246 solidarity fund for, 54, 244, 264 Stability and Growth Pact, 245 standard models, 211–13 state development banks, 138 steel companies, 55 stock market, 151 stock market bubble, 200–201 stock market crash (1929), 18, 95 stock options, 259, 359 structural deficit, 245 Structural Funds, 243 structural impediments, 215 structural realignment, 252–56 structural reforms, 9, 18, 19–20, 26–27, 214–36, 239–71, 307 from austerity to growth, 263–65 banking union, 241–44 and climate change, 229–30 common framework for stability, 244–52 counterproductive, 222–23 debt restructuring and, 265–67 of finance, 228–29 full employment and growth, 256–57 in Greece, 20, 70, 188, 191, 214–36 growth and, 232–35 shared prosperity and, 260–61 and structural realignment, 252–56 of trade deficits, 216–17 trauma of, 224 as trivial, 214–15, 217–20, 233 subsidiarity, 8, 41–42, 263 subsidies: agricultural, 45, 197 energy, 197 sudden stops, 111 Suharto, 314 suicide, 82, 344 Supplemental Nutrition Assistance Program (SNAP), 91 supply-side effects: in Greece, 191, 215–16 of investments, 367 surpluses, fiscal, 17, 96, 312, 379 primary, 187–88 surpluses, trade, see trade surpluses “Swabian housewife,” 186, 245 Sweden, 12, 46, 307, 313, 331, 335, 339 euro referendum of, 58 refugees into, 320 Switzerland, 44, 307 Syria, 321, 342 Syriza party, 309, 311, 312–13, 315, 377 Taiwan, 55 tariffs, 40 tax avoiders, 74, 142–43, 227–28, 261 taxes, 142, 290, 315 in Canada, 191 on capital, 356 on carbon, 230, 260, 265, 368 consumption, 193–94 corporate, 189–90, 227, 251 cross-border, 319, 384 and distortions, 191 in EU, 8, 261 and fiat currency, 284 and free mobility of goods and capital, 260–61 in Greece, 16, 142, 192, 193–94, 227, 367–68 ideal system for, 191 IMF’s warning about high, 190 income, 45 increase in, 190–94 inequality and, 191 inheritance, 368 land, 191 on luxury cars, 265 progressive, 248 property, 192–93, 227 Reagan cuts to, 168, 210 shipping, 227, 228 as stimulative, 368 on trade surpluses, 254 value-added, 190, 192 tax evasion, in Greece, 190–91 tax laws, 75 tax revenue, 190–96 Taylor, John, 169 Taylor rule, 169 tech bubble, 250 technology, 137, 138–39, 186, 211, 217, 251, 258, 265, 300 and new financial system, 274–76, 283–84 telecoms, 55 Telmex, 369 terrorism, 319 Thailand, 113 theory of the second best, 27–28, 48 “there is no alternative” (TINA), 306, 311–12 Tocqueville, Alexis de, xiii too-big-to-fail banks, 360 tourism, 192, 286 trade: and contractionary expansion, 209 US push for, 323 trade agreements, xiv–xvi, 357 trade balance, 81, 93, 100, 109 as allegedly self-correcting, 98–99, 101–3 and wage flexibility, 104–5 trade barriers, 40 trade deficits, 89, 139 aggregate demand weakened by, 111 chit solution to, 287–88, 290, 299–300, 387, 388–89 control of, 109–10, 122 with currency pegs, 110 and fixed exchange rates, 107–8, 118 and government spending, 107–8, 108 of Greece, 81, 194, 215–16, 222, 285–86 structural reform of, 216–17 traded goods, 102, 103, 216 trade integration, 393 trade surpluses, 88, 118–21, 139–40, 350–52 discouragement of, 282–84, 299–300 of Germany, 118–19, 120, 139, 253, 293, 299, 350–52, 381–82, 391 tax on, 254, 351, 381–82 Transatlantic Trade and Investment Partnership, xv, 323 transfer price system, 376 Trans-Pacific Partnership, xv, 323 Treasury bills, US, 204 Trichet, Jean-Claude, 100–101, 155, 156, 164–65, 251 trickle-down economics, 362 Troika, 19, 20, 26, 55, 56, 58, 60, 69, 99, 101–3, 117, 119, 135, 140–42, 178, 179, 184, 195, 274, 294, 317, 362, 370–71, 373, 376, 377, 386 banks weakened by, 229 conditions of, 201 discretion of, 262 failure to learn, 312 Greek incomes lowered by, 80 Greek loan set up by, 202 inequality created by, 225–26 poor forecasting of, 307 predictions by, 249 primary surpluses and, 187–88 privatization avoided by, 194 programs of, 17–18, 21, 155–57, 179–80, 181, 182–83, 184–85, 187–93, 196, 197–98, 202, 204, 205, 207, 208, 214–16, 217, 218–23, 225–28, 229, 231, 233–34, 273, 278, 308, 309–11, 312, 313, 314, 315–16, 323–24, 348, 366, 379, 392 social contract torn up by, 78 structural reforms imposed by, 214–16, 217, 218–23, 225–38 tax demand of, 192 and tax evasion, 367 see also European Central Bank (ECB); European Commission; International Monetary Fund (IMF) trust, xix, 280 Tsipras, Alexis, 61–62, 221, 273, 314 Turkey, 321 UBS, 355 Ukraine, 36 unemployment, 3, 64, 68, 71–72, 110, 111, 122, 323, 336, 342 as allegedly self-correcting, 98–101 in Argentina, 267 austerity and, 209 central banks and, 8, 94, 97, 106, 147 ECB and, 163 in eurozone, 71, 135, 163, 177–78, 181, 331 and financing investments, 186 in Finland, 296 and future income, 77 in Greece, xi, 71, 236, 267, 331, 338, 342 increased by capital, 264 interest rates and, 43–44 and internal devaluation, 98–101, 104–6 migration and, 69, 90, 135, 140 natural rate of, 172–73 present-day, in Europe, 210 and rise of Hitler, 338, 358 and single currency, 88 in Spain, 63, 161, 231, 235, 332, 338 and structural reforms, 19 and trade deficits, 108 in US, 3 youth, 3, 64, 71 unemployment insurance, 91, 186, 246, 247–48 UNICEF, 72–73 unions, 101, 254, 335 United Kingdom, 14, 44, 46, 131, 307, 331, 332, 340 colonies of, 36 debt of, 202 inflation target set in, 157 in Iraq War, 37 light regulations in, 131 proposed exit from EU by, 4, 270 United Nations, 337, 350, 384–85 creation of, 38 and lower rates of war, 196 United States: banking system in, 91 budget of, 8, 45 and Canada’s 1990 expansion, 209 Canada’s free trade with, 45–46, 47 central bank governance in, 161 debt-to-GDP of, 202, 210–11 financial crisis originating in, 65, 68, 79–80, 128, 296, 302 financial system in, 228 founding of, 319 GDP of, xiii Germany’s borrowing from, 187 growing working-age population of, 70 growth in, 68 housing bubble in, 108 immigration into, 320 migration in, 90, 136, 346 monetary policy in financial crisis of, 151 in NAFTA, xiv 1980–1981 recessions in, 76 predatory lending in, 310 productivity in, 71 recovery of, xiii, 12 rising inequality in, xvii, 333 shareholder capitalism of, 21 Small Business Administration in, 246 structural reforms needed in, 20 surpluses in, 96, 187 trade agenda of, 323 unemployment in, 3, 178 united currency in, 35, 36, 88, 89–92 United States bonds, 350 unskilled workers, 134–35 value-added tax, 190, 192 values, 57–58 Varoufakis, Yanis, 61, 221, 309 velocity of circulation, 167 Venezuela, 371 Versaille, Treaty of, 187 victim blaming, 9, 15–17, 177–78, 309–11 volatility: and capital market integration, 28 in exchange rates, 48–49 Volcker, Paul, 157, 168 wage adjustments, 100–101, 103, 104–5, 155, 216–17, 220–22, 338, 361 wages, 19, 348 expansionary policies on, 284–85 Germany’s constraining of, 41, 42–43 lowered in Germany, 105, 333 wage stagnation, in Germany, 13 war, change in attitude to, 38, 196 Washington Consensus, xvi Washington Mutual, 91 wealth, divergence in, 139–40 Weil, Jonathan, 360 welfare, 196 West Germany, 6 Whitney, Meredith, 360 wind energy, 193, 229 Wolf, Martin, 385 worker protection, 56 workers’ bargaining rights, 19, 221, 255 World Bank, xv, xvii, 10, 61, 337, 357, 371 World Trade Organization, xiv youth: future of, xx–xxi unemployment of, 3, 64, 71 Zapatero, José Luis Rodríguez, xiv, 155, 362 zero lower bound, 106 ALSO BY JOSEPH E.


pages: 590 words: 153,208

Wealth and Poverty: A New Edition for the Twenty-First Century by George Gilder

"Robert Solow", affirmative action, Albert Einstein, Bear Stearns, Bernie Madoff, British Empire, business cycle, capital controls, cleantech, cloud computing, collateralized debt obligation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversified portfolio, Donald Trump, equal pay for equal work, floating exchange rates, full employment, George Gilder, Gunnar Myrdal, Home mortgage interest deduction, Howard Zinn, income inequality, independent contractor, invisible hand, Jane Jacobs, Jeff Bezos, job automation, job-hopping, Joseph Schumpeter, knowledge economy, labor-force participation, longitudinal study, margin call, Mark Zuckerberg, means of production, medical malpractice, minimum wage unemployment, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, mortgage debt, non-fiction novel, North Sea oil, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, Ponzi scheme, post-industrial society, price stability, Ralph Nader, rent control, Robert Gordon, Ronald Reagan, San Francisco homelessness, Silicon Valley, Simon Kuznets, skunkworks, Steve Jobs, The Wealth of Nations by Adam Smith, Thomas L Friedman, upwardly mobile, urban renewal, volatility arbitrage, War on Poverty, women in the workforce, working poor, working-age population, yield curve, zero-sum game

Thus, if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will falter and die!2 Even in the absence of depression, said Keynes, there are many reasons for a faltering of the animal spirits.3 Perhaps the key Keynesian argument is the paradox of thrift: one person can provide more for his future by saving more—that is, by forgoing consumption. But if most people decide to buy less goods and save more money, incomes will collapse because of a lack of consumer demand and a resulting decline in investment. In the end, people will have less money to save than they had in the first place.

The mathematical dazzle of the theory of general equilibrium, launched by Leon Walras, and the scintillating novelties arrayed by his modern followers, should not distract the economics profession from the continuing sagas of cabbages and kings, bombs and beanstalks, silicon chips and business psychology. In this effort, it may be useful to return to Keynes, both because of his massive role in modern economics and because he is known as the leading apostle of the primacy of demand. In Keynes’ paradox of thrift, he showed that intentions and declarations of individuals may be a quite unreliable guide to the effects of their behavior (one man may intend to save, but if too many do, the result may be less savings). This is the aggregative fallacy, and it can be found in many of the key issues of contemporary political economics, from the effects of taxes to the role of the state.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, tail risk, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

The crucial point, however, is that the new debtors are not the same as the old ones. It is necessary for the creditworthy to borrow when those who are no longer creditworthy cannot. If everybody tries to cut down on borrowing and spending at the same time, the result will be a depression: that is the ‘paradox of thrift’ – a phrase first popularized by the late Nobel laureate, Paul Samuelson.68 Yet another explanation was politics. In the US, for both electoral and ideological reasons, the Republican Party was irrevocably opposed to the idea that the government could do anything useful about the economy except by leaving it alone, and so could not tolerate the possibility that the Obama administration might prove the opposite in the aftermath of the biggest economic crisis for eighty years.

Output and incomes will then go on falling until desired savings again match intended investment. Unhappily, as the economy weakens, desired investment might fall further. In that case the economy could just go on shrinking. A greater desire to save could then well be highly unwelcome, since it may result in a prolonged and deep recession. This is the paradox of thrift. The standard ways to address the danger of a recession are for the central bank to cut interest rates, and for the government to spend more or cut taxes. A difficulty arises for the first of these solutions, if short-term interest rates are close to zero, as they are at the time of writing (see Figure 29).


pages: 1,066 words: 273,703

Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze

Affordable Care Act / Obamacare, Apple's 1984 Super Bowl advert, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bond market vigilante , Boris Johnson, break the buck, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, dark matter, deindustrialization, desegregation, Detroit bankruptcy, Dissolution of the Soviet Union, diversification, Doha Development Round, Donald Trump, Edward Glaeser, Edward Snowden, en.wikipedia.org, energy security, eurozone crisis, Fall of the Berlin Wall, family office, financial intermediation, fixed income, Flash crash, forward guidance, friendly fire, full employment, global reserve currency, global supply chain, global value chain, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, housing crisis, Hyman Minsky, illegal immigration, immigration reform, income inequality, interest rate derivative, interest rate swap, Kenneth Rogoff, large denomination, light touch regulation, Long Term Capital Management, margin call, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, mittelstand, money market fund, moral hazard, mortgage debt, mutually assured destruction, negative equity, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, old-boy network, open economy, paradox of thrift, Peter Thiel, Ponzi scheme, Post-Keynesian economics, predatory finance, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Silicon Valley, South China Sea, sovereign wealth fund, special drawing rights, Steve Bannon, structural adjustment programs, tail risk, The Great Moderation, Tim Cook: Apple, too big to fail, trade liberalization, upwardly mobile, Washington Consensus, We are the 99%, white flight, WikiLeaks, women in the workforce, Works Progress Administration, yield curve, éminence grise

The “overarching risk” to the world economy was of an intensified global “paradox of thrift.” As households, firms and governments around the world all tried to cut their deficits at once, there was an acute risk of global recession. “This risk is further exacerbated,” the IMF went on, “by fragile financial systems, high public deficits and debt, and already-low interest rates, making the current environment fertile ground for multiple equilibria—self-perpetuating outcomes resulting from pessimism or optimism, notably in the euro area.”2 The place where the paradoxes of thrift were most visible was Greece. I In the protracted struggle to get to the October 2011 debt deal for Greece, the entire discussion had revolved around the Greek budget and concessions to be made by its creditors.

Though they had coauthored Germany’s own debt brake, the SPD was alarmed by the disastrous development in the eurozone. They were soaring in the polls, and what the SPD demanded in 2012 was a new focus not on debt and fiscal sustainability but on growth. And this appeal received support from an unexpected corner: the IMF. The emphasis on the paradox of thrift in the G20 briefing for Mexico City was the first sign of a major shift in Fund thinking on fiscal policy.20 In the summer of 2012 its staff revisited the forecasts they had made in the spring of 2010 as the eurozone crisis began and discovered that they had systematically underestimated the negative impact of budget cuts.


pages: 249 words: 66,383

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again by Atif Mian, Amir Sufi

"Robert Solow", Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, break the buck, business cycle, Carmen Reinhart, collapse of Lehman Brothers, creative destruction, debt deflation, Edward Glaeser, en.wikipedia.org, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, liquidity trap, Long Term Capital Management, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, quantitative easing, Robert Shiller, Robert Shiller, school choice, shareholder value, the payments system, the scientific method, tulip mania, young professional, zero-sum game

Irving Fisher, “The Debt-Deflation Theory of Great Depressions,” Econometrica 1 no. 4 (1933): 337–57. 10. For example, Zhen Huo and Jose-Victor Rios-Rull build an economic model in which a recession is generated when wealth is destroyed because it is difficult to shift resources to the production of goods for export. Zhen Huo and Jose-Victor Rios-Rull, “Engineering a Paradox of Thrift Recession” (working paper, University of Minnesota, Minneapolis, December 2012). 11. We build this formal model in Atif Mian and Amir Sufi, “What Explains High Unemployment?: The Aggregate Demand Channel” (working paper, University of Chicago Booth School of Business, 2012). Chapter Five 1.


pages: 225 words: 11,355

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis by Kevin Mellyn

asset-backed security, bank run, banking crisis, Bernie Madoff, bond market vigilante , bonus culture, Bretton Woods, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, disintermediation, diversification, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, foreign exchange controls, Francis Fukuyama: the end of history, George Santayana, global reserve currency, Home mortgage interest deduction, Isaac Newton, joint-stock company, Kickstarter, liquidity trap, London Interbank Offered Rate, long peace, margin call, market clearing, mass immigration, Money creation, money market fund, moral hazard, mortgage tax deduction, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, Plutocrats, plutocrats, Ponzi scheme, profit maximization, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, tail risk, The Great Moderation, the new new thing, the payments system, too big to fail, value at risk, very high income, War on Poverty, Y2K, yield curve

THE GHOST OF LORD KEYNES Keynes was never what the press or politicians would call a Keynesian. He was pragmatic for an intellectual and made a small fortune speculating in stocks. His famous book, which nobody reads, The General Theory, was largely concerned with solving the problem posed by deflation. This is called the ‘‘paradox of thrift’’ or the ‘‘liquidity trap.’’ If you stop spending money because your job is uncertain and things are getting cheaper all the time, you are doing the right thing for you. But if everyone does this, spending and work dry up and you have a deflationary spiral leading to a prolonged depression like that of the 1930s.


pages: 290 words: 76,216

What's Wrong With Economics: A Primer for the Perplexed by Robert Skidelsky

"Robert Solow", additive manufacturing, agricultural Revolution, Black Swan, Bretton Woods, business cycle, Cass Sunstein, central bank independence, cognitive bias, conceptual framework, Corn Laws, corporate social responsibility, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, disruptive innovation, Donald Trump, full employment, George Akerlof, George Santayana, global supply chain, global village, Gunnar Myrdal, happiness index / gross national happiness, hindsight bias, Hyman Minsky, income inequality, index fund, inflation targeting, information asymmetry, Internet Archive, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labour market flexibility, loss aversion, Mahbub ul Haq, Mark Zuckerberg, market clearing, market friction, market fundamentalism, Martin Wolf, means of production, Modern Monetary Theory, moral hazard, paradox of thrift, Pareto efficiency, Paul Samuelson, Philip Mirowski, precariat, price anchoring, principal–agent problem, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, shareholder value, Silicon Valley, Simon Kuznets, sunk-cost fallacy, survivorship bias, technoutopianism, The Chicago School, The Market for Lemons, The Nature of the Firm, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, Tragedy of the Commons, transaction costs, transfer pricing, Vilfredo Pareto, Washington Consensus, Wolfgang Streeck, zero-sum game

Keynes’s chief failing is an underdeveloped ontology – one which lacks a genuine sociological or historical perspective. He recognises that ‘the atomic hypothesis which has worked so splendidly in physics breaks down in psychics’, and gives examples like the ‘fallacy of composition’ and the ‘paradox of thrift’. But he leaves it there.6 So an improved ontology – the study of what exists and of the basic constitution and nature of social phenomena – should be the second pillar of a reformed economics. The orthodox map of reality is peopled only with individuals; to the extent that they are recognised at all, groups and institutions exist only as instruments, tools like technology.


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Garrett Hardin, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, trickle-down economics, two and twenty, Washington Consensus, wealth creators, working poor, yield curve

If you spend a lot when you are earning a lot, you are spending cyclically; if you take the opportunity to save money when it is rolling in, you are behaving countercyclically. The need for banks and indeed whole economies to behave countercyclically has been a theme of the Great Recession. If everyone reacts to recession by spending less money, the recession will get worse: Keynes called this the ”paradox of thrift.” What’s needed is for more people to behave countercyclically. In a similar way, banks and governments should in future be encouraged to build up greater reserves during the good times. Davos Another metonym: it’s a place in Switzerland, the setting for Thomas Mann’s novel The Magic Mountain, but also the place where the World Economic Forum has its annual meeting of 2,500-odd delegates and hacks.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

activist fund / activist shareholder / activist investor, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bond market vigilante , bonus culture, Bretton Woods, business climate, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

This is because if we all individually cut our spending to increase our savings, then our collective savings will paradoxically fall because one person’s spending is another’s income. If no one else in the economy wants to use all the increased savings for investment, we are up against the phenomenon known as the paradox of thrift. This arises in circumstances where a debt-induced financial crisis robs interest rates of their ability to stimulate increased consumption, investment and economic recovery – in other words, where cutting interest rates no longer has much impact. This concept is usually attributed to Keynes, who undoubtedly did a great deal to make debt respectable in the Great Depression, but it goes back at least as far as Bernard Mandeville, whose Fable of the Bees we encountered in Chapter One.


pages: 339 words: 95,270

Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace by Matthew C. Klein

Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, Berlin Wall, Bernie Sanders, Branko Milanovic, Bretton Woods, British Empire, business climate, business cycle, capital controls, centre right, collective bargaining, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, deglobalization, deindustrialization, Deng Xiaoping, Donald Trump, Double Irish / Dutch Sandwich, Fall of the Berlin Wall, falling living standards, financial innovation, financial repression, fixed income, full employment, George Akerlof, global supply chain, global value chain, illegal immigration, income inequality, intangible asset, invention of the telegraph, joint-stock company, land reform, Long Term Capital Management, Malcom McLean invented shipping containers, manufacturing employment, Martin Wolf, mass immigration, Mikhail Gorbachev, Money creation, money market fund, mortgage debt, New Urbanism, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, open economy, paradox of thrift, passive income, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Scramble for Africa, sovereign wealth fund, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, trade liberalization, Wolfgang Streeck

Had Germany been a closed economy, its moribund business investment, tight government budgets, and falling wages would have forced down domestic spending and limited the rise in corporate profits. Production and income would not have grown faster than spending. That was Keynes’s insight with the “paradox of thrift.” National saving would have been unchanged, there would have been no trade surplus, and there would have been no impact on other countries. Germany, however, was not a closed economy. More than a quarter of the value generated by German workers and capital was sent abroad before 2008, mostly to Germany’s European neighbors.


pages: 370 words: 102,823

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

balance sheet recession, banking crisis, basic income, Bear Stearns, Bernie Sanders, Bretton Woods, business climate, business cycle, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, G4S, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, mass incarceration, Modern Monetary Theory, Money creation, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, Paul Samuelson, Post-Keynesian economics, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, Tragedy of the Commons, transaction costs, trickle-down economics, universal basic income, very high income

Gurkaynak, eds, Taming Capital Flows: Capital Account Management in an Era of Globalization, IEA Conference Volume No. 154, New York, Palgrave Macmillan, 2015) that the problem is not really a savings glut: there are huge needs for investment on the global level. Unfortunately, the global financial system is unable to intermediate—to ensure that the available savings is used to finance the real global investment needs. The consequence is the ‘paradox of thrift’: savings leads to inadequate aggregate demand. 43 A. Berg and J. Ostry, Inequality and Unsustainable Growth: Two Sides of the Same Coin? IMF Staff Discussion Note No. 11/08, April 2011, International Monetary Fund. 44 F. Cingano, Trends in Income Inequality and Its Impact on Economic Growth, OECD Social, Employment and Migration Working Papers, no. 163, Dec. 2014, OECD Publishing. 45 The discussion below emphasises three channels.


pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

Asian financial crisis, bank run, Bear Stearns, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, buy and hold, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, high net worth, income inequality, interest rate derivative, John Meriwether, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, private sector deleveraging, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, sovereign wealth fund, special drawing rights, special economic zone, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, War on Poverty, Washington Consensus, zero-sum game

Behavioral economics possesses powerful tools and can offer superb insights despite occasional misuse. It is at its best when used to answer questions rather than force results. Exploration of the paradox of Keynesianism is one possibly fruitful area of behavioral economic research with potential to mitigate the currency wars. Keynesianism was proposed in part to overcome the paradox of thrift. Keynes pointed out that in times of economic distress an individual may respond by reducing spending and increasing savings. However, if everyone does the same thing, distress becomes even worse because aggregate demand is destroyed, which can cause businesses to close and unemployment to rise.


Hedgehogging by Barton Biggs

activist fund / activist shareholder / activist investor, asset allocation, backtesting, barriers to entry, Bear Stearns, Bretton Woods, British Empire, business cycle, buy and hold, diversification, diversified portfolio, eat what you kill, Elliott wave, family office, financial independence, fixed income, full employment, hiring and firing, index fund, Isaac Newton, job satisfaction, margin call, market bubble, Mikhail Gorbachev, new economy, oil shale / tar sands, paradox of thrift, Paul Samuelson, Ponzi scheme, random walk, risk free rate, Ronald Reagan, secular stagnation, Sharpe ratio, short selling, Silicon Valley, transaction costs, upwardly mobile, value at risk, Vanguard fund, zero-sum game, éminence grise

If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave to private enterprise on the welltried principles of laissez-faire to dig the notes up again . . . there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. Keynes’ thought process and analysis, of course, was influenced by the Great Depression. He attributed much of the depression and deflation the world was suffering to unspent savings, the paradox of thrift. “The more virtuous we are, the more determinedly thrifty, the more obstinately orthodox in our national and personal finance, the more incomes will have to fall when interest rates rise relative to the mar- ccc_biggs_ch21_285-304.qxd 11/29/05 7:19 AM Page 299 John Maynard Keynes 299 ginal efficiency of capital.”


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

"Robert Solow", bank run, banking crisis, Bear Stearns, Benoit Mandelbrot, Berlin Wall, Black Swan, bond market vigilante , bonus culture, Bretton Woods, BRICs, business cycle, buy and hold, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, eat what you kill, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, foreign exchange controls, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, Nelson Mandela, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

Actions that seem rational for individuals can become dangerously counterproductive when undertaken by millions of people or businesses all moving at once. This is an obvious fallacy of composition familiar in many social situations, such as crowd control, yet it is a problem that classical economics largely ignored. The paradox of thrift is perhaps the most important of the fallacies of composition created by imbalances between reality and expectations about an uncertain future. When one household increases its savings, money flows into the financial system and from there into investment, increasing the total of personal and social wealth.


pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, bond market vigilante , Boris Johnson, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, Money creation, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, tail risk, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, WikiLeaks, working-age population, zero-sum game

‘By far the most profound change in Britain’s economy in the past decade,’ he told the assembled company, ‘has been intergenerational redistribution caused by rampant house price growth.’ He went on to mention his ‘surprise’ that younger people hadn’t kicked up more of a fuss (see here). The Bank’s concern was the paradox of thrift, also known as the paradox of policy. In the longer term, Britain needed more savings and investment. Right now, to get savers to spend, what was needed was a near-zero interest rate (negative in real terms), plus quantitative easing. Mr Bean was again amazingly clear: ‘What we’re trying to do by our policy is encourage more spending.


pages: 593 words: 189,857

Stress Test: Reflections on Financial Crises by Timothy F. Geithner

Affordable Care Act / Obamacare, asset-backed security, Atul Gawande, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Bernie Sanders, break the buck, Buckminster Fuller, Carmen Reinhart, central bank independence, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Doomsday Book, eurozone crisis, financial innovation, Flash crash, Goldman Sachs: Vampire Squid, housing crisis, Hyman Minsky, illegal immigration, implied volatility, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, Nate Silver, negative equity, Northern Rock, obamacare, paradox of thrift, pets.com, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, RAND corporation, regulatory arbitrage, reserve currency, Saturday Night Live, Savings and loan crisis, savings glut, selection bias, short selling, sovereign wealth fund, tail risk, The Great Moderation, The Signal and the Noise by Nate Silver, Tobin tax, too big to fail, working poor

We all felt the stimulus should be as big as possible and passed as soon as possible. Governments always face political pressure to tighten their belts during crises, because families and businesses are tightening theirs. But for countries that can afford to borrow, austerity in a crisis is a dangerously misguided approach. Keynes recognized this “paradox of thrift,” the idea that saving by individuals, considered virtuous in normal times, can cripple society’s demand for goods and services during a downturn if everyone pulls back at once. One family’s spending is another family’s income; the less people spend, the less people earn, and the less people earn, the less they have to spend.


Money and Government: The Past and Future of Economics by Robert Skidelsky

anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Bear Stearns, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, market clearing, market friction, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, mobile money, Modern Monetary Theory, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, placebo effect, price stability, profit maximization, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

The trouble, explained his Chancellor, Alistair Darling, was the ‘Taliban wing’ of the Treasury who thought Snowden was right.8 The global turning point can be dated from the meeting of the G7’s finance ministers at Iqaluit in Canada in February 2010, which, dominated by the Greek crisis, committed governments to slashing deficits.9 Orthodox economists argued that cutting public spending would boost output by reducing borrowing costs and increasing confidence. 224 t h e di s a bl e m e n t of f i s c a l p ol ic y In a pallid echo of Keynes’s ‘paradox of thrift’, the larger G20 acknowledged, in a declaration following its 2010 Toronto summit, that ‘synchronised financial adjustment [i.e. if all governments tried to reduce their deficits simultaneously] across several major economies could adversely impact the recovery’,10 but only President Obama stood out against the stampede towards what Germany’s Finance Minister Wolfgang Schäuble approvingly dubbed ‘expansionary fiscal consolidation’.


pages: 1,242 words: 317,903

The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby

"Robert Solow", airline deregulation, airport security, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Bear Stearns, Benoit Mandelbrot, bond market vigilante , Bretton Woods, business cycle, central bank independence, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, energy security, equity premium, fiat currency, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, Hyman Minsky, inflation targeting, information asymmetry, interest rate swap, inventory management, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Kenneth Rogoff, Kickstarter, Kitchen Debate, laissez-faire capitalism, Long Term Capital Management, low skilled workers, market bubble, market clearing, Martin Wolf, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, Northern Rock, paper trading, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, popular capitalism, price stability, RAND corporation, rent-seeking, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, Saturday Night Live, Savings and loan crisis, savings glut, secular stagnation, short selling, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, unorthodox policies, upwardly mobile, WikiLeaks, women in the workforce, Y2K, yield curve, zero-sum game

When the first doubleheader plowed across the Dakotas to the Pacific seaboard, the American empire was riding in that train of cars, and the plumes of smoke that streamed out from the engine signified as much as the burning powder over Gettysburg.19 Greenspan also imbibed Keynes, both indirectly and directly. He read the work of Alvin Hansen, an eminent Harvard economist who had embraced Keynes’s writings during the 1930s. Hansen had seized upon Keynes’s chief insight—the so-called paradox of thrift—and given it a new twist, influencing both policy makers and a younger generation of economists. Keynes’s paradox described how a cyclical downturn could feed on itself: when the economy slowed, cautious consumers would seek to save, depriving businesses of customers and so exacerbating the slowdown.