Skousen, Economic Logic

EL Chapter 22, Government Debt, p. 517

p. 520 rational expectations.

in contrast to adaptive expectations.

Demand-sider explanation of 1970s high inflation with high unemployment.

Supply shocks, such as large increases in the price of oil.

Shifts down aggregate production function, less output, higher prices.

Higher unemployment because it takes time for factors to adjust to the shock.

Thus demand-siders say there was no contradiction to the Phillips curve.

P. 521: four basic ideas of demand-side policy

1. In a depression, there is a lack of aggregate demand.

2. The free market remedy is slow or non-existent.

3. Government can provide the needed aggregage demand by expansionary policies.

4. Monetary policy may not be effective, so more spending is needed.

Supply siders say the problem during a depression is lack of supply.

Insufficient supply is caused by government interventions that distort the economy.

Supply-side policy provides a sustainable stimulus.

Greater supply generates greater demand by paying the factors of production.

When journalists emphasize consumer confidence, they apply Keynesianism.

P. 522: critique of Keynesian economics

Which economist provided the most influential critique?

Milton Friedman. Biog. p. 445.

Study of the Great Depression of the 1930s.

The Fed failed to prevent massive deflation.

Monetary policy does matter.

Price inflation is caused by monetary inflation,

and a large price deflation is caused by monetary deflation.

From Aug. 1929 to March 1933, the money supply shrank by one third.

MV = PT.

P. 523: is the free market inherently unstable.

By the geo-Austrian cycle theory, the boom-bust sequence is caused by government fiscal and monetary policies, not by the market. There is no pure free market.

Something that does not exist cannot cause anything.

Friedman: the Great Depression was caused by government mismanagement.

With stable money and flexible prices, a free market can flourish.

However, the Henry George perspective adds that subsidies to real estate can also cause a boom and bust. A free market has to exclude subsides as well as tax burdens.

P. 524: Demand-side doctrines is anti-savings.

That greater consumption raises the Keynesian multiplier.

Skousen: the proposition that savings retards output is bogus.

The classical theory: more savings, lower interest rates, more investment, more growth.

The Keynesian proposition is that savings does not get invested.

false under normal conditions.

If true during a depression, spending such as for war just wastes resources.

Investment is also spending.

Impact of deficit spending.

Domestic borrowing crowds out private investment.

When the Fed creates the money for spending, it monetizes government debt.

Results in inflation, a distortion of relative prices, asset bubbles, recession.

When foreigners buy the debt, does not crowd out, but leaves a future drain of funds.

P. 526: possibility of national bankruptcy, or hyperinflation.

P. 527: advantages of deficits.

Can be good policy if for investment.

Deficits for war?

Case against deficit spending.

Crowds out private investment and risk taking.

Redistributes wealth to wealthy bond owners.

Promotes irresponsible spending and excessive government.

Sends a message to the public that debt is OK.

High deficits put pressure on central banks to buy the debt and expand money.

Higher taxes on future taxpayers to pay for past government consumption.

High debt makes government vulnerable to a financial crisis.

Three schools of free-market thought:

Chicago, Vienna, San Francisco.

Chapter 23 - Government regulation and controls

Sarbanes-Oxley Act of 2002. Loss of $1.4 of shareholder value.

Private ways of preventing bad service: BBb, Underwriter’s Laboratories, Consumer Reports

Web sites with product ratings.

FDA protects, but also kills.

Regulation makes it more costly to compete, especially smaller companies.

p. 541: Regulatory capture - e.g. financial industry.

Deregulation of airlines reduced prices.

Rent control: shortages, less service and maintenance, less mobility,

many who benefit are wealthy, difficult to evict bad tenants.

Government loves landowners but hates landlords.

Example of market in medical service: laser eye surgery.

Problem: medical care tied to employment.