Who You Gonna Believe – Me or Your Lyin’ Eyes?

Understanding recession as not enough demand is about as certain a way to lose the thread as it is possible to be. In an exchange economy, people producing what others do not want to buy is the cause of unemployment and a flat economy. If you want to fix it, you need to let market adjustments happen. This is all brought to mind from the latest gloom discussed in a survey of American economists compiled and published by the Associated Press:

The U.S. economic recovery will remain slow deep into next year, held back by shoppers reluctant to spend and employers hesitant to hire, according to an Associated Press survey of leading economists.

The latest quarterly AP Economy Survey shows economists have turned gloomier in the past three months. They foresee weaker growth and higher unemployment than they did before. As a result, the economists think the Federal Reserve will keep interest rates near zero until at least next spring.

Yet despite their expectation of slower growth, a majority of the 42 economists surveyed believe the recovery remains on track, raising hopes that the economy can avoid falling back into a ‘double-dip’ recession.

The AP survey compiles forecasts of leading private, corporate and academic economists on a range of indicators, including employment, consumer spending and inflation. Among their forecasts:

• Economic growth the rest of this year and early next year will weaken, to less than 3 percent. From January through May, the economy grew at roughly a 3.5 percent pace.

• The unemployment rate will be no lower at the end of the year than it is now — 9.5 percent. A majority think it will be 2015 or later before the rate falls to a historically normal 5 percent.

• State budget shortfalls pose a ‘significant’ or ‘severe’ risk to the national economy. The loss of tax revenue has forced state and local governments to cut services and lay off workers.

Reluctance to spend and hesitant to hire are ways of stating things as if aggregate demand is what matters. The posting below that points out the ongoing and desperate attempts to prove that the stimulus did some good – based this time on some Keynesian econometric model – are wearing thin in the face of the realities the American economy faces. It’s what everyone is taught but is wrong all the same.

Who you gonna believe, as Keynes used to say, me or your lyin’ eyes?

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7 Responses to Who You Gonna Believe – Me or Your Lyin’ Eyes?

  1. Entropy

    In an exchange economy, people producing what others do not want to buy is the cause of unemployment and a flat economy.

    Even in America, it is pretty obvious that Apple Inc is not suffering any recession.

  2. Infidel Tiger

    Nor Smith & Wesson.

  3. pedro

    I think that the old keynsian message is crap, but it is plain denialism to think that recessions are not made worse by fear.

  4. Infidel Tiger

    No doubt, Pedro. I fear a Keynsian being in charge everytime a recession is upon us.

  5. pedro

    Everything in moderation I say.

  6. entropy

    There is definitely some truth in what you say, Pedro, but the point of the Apple example (and S&W?) is that even in a fearful climate, if you produce products that people desire, they will buy. it is not as though there was this huge pent up demand for tablets: they have been around for a decade. It is just that nobody wanted one until Apple made the iPad.

    I am using the Apple example to demonstrate that Says Law is correct, and Keynsian stimulus does little else but artificially put the reckoning off for a bit.

  7. pedro

    I don’t think we’ll solve the recession by inventing ipads, but this is nicely put:

    “Current experience is also consistent with (but not unambiguously favoring) an Austrian-like view that the stimulus boosts some activity and then shortly thereafter pulls away the rug, leaving us more or less back where we started, albeit with some smoothing gains in the short run and some adjustment costs in the longer run. The persistence and scale-up from the initial fiscal boost is hardly guaranteed. The empirical papers on multipliers are not to be trusted and the results are in any case hard to generalize from one period to another.

    Harald Uhlig’s paper is one statement of the case against stimulus. There is nothing measured by the Alan Blinder study which rules out the central result of this paper, namely transitory gains in the short run and high costs in the longer run.”

    http://www.marginalrevolution.com/marginalrevolution/2010/07/blunt-opinions-supported-elsewhere-but-not-here.html#comments

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