Sunday, December 04, 2011

Keynes vs. Hayek

Probably most people have seen this video or know about it. We watched it in my macro classes this week. There are actually two videos. Here they are in order. My class saw the second one. Then there is a link to readings over these issues.

Fear the Boom and Bust

Fight of the Century: Keynes vs. Hayek Round Two

Get the Story Behind the Fight of the Century

If you want to tell Russ Roberts, the economics professor who made the video, what you think, go to Fight of the Century in the classroom

Fight of the Century with Polish subtitles


Anonymous said...

just wondering, whose ideas do you think are most accurate

Cyril Morong said...

Thanks for dropping by. I tend to agree more with Hayek since I think the government does not have enough information to do the right things. There are also policy lags when trying to correct recessions. By the time the government policy starts to work it might be wrong for the economy.

Anonymous said...

Another thought, would you have some insight on what you think the economy would be currently if the government wouldnt have at least tried to stimulate the economy at the trough of the great recession?

Cyril Morong said...

I sure wish I could give a good answer to that. My guess is that it would have helped a little to get the spending going sooner. How much, I don't know. A couple of economists say that recovery from a recession caused by a financial crisis like the on we had take longer to recover from.

If the spending had come sooner, the GDP would not have falled as much as it did. I think this could have affected confidence and prevented some layoffs. Unemployment eventually did go over 10%. My guess is that even with what I think are the best possible policies, it still would have hit 9%.

Also, here is something from the Wall Street Journal last December about how GDP growth is related to unemployment:

"Okun's Law," as it came to be known, has been tweaked over the years, and now states that for every two percentage points the economy grows above its long-term trend annually, unemployment falls by a percentage point.

Most economists peg the economy's long-term trend rate at about 2.5%, which is roughly where economists polled by The Wall Street Journal estimate growth stands in the current quarter.That means, according to Okun's Law, that the economy isn't growing fast enough to bring down unemployment."

So let's say that we could have added in 2% of GDP, maybe that knocks down the UE rate by 1 percentage point. That is an extra $300 billion in GDP. That might be alot to expect the government to generate quickly. It also depends on how big the multiplier is. Economists disagree on that.

The president's council of economic advisors said it was 1.6. If we go with that and if we could have spent, say $500 right away at the trough of the recession, we generate $800 billion in GDP (that is probably a best case scenario). Maybe GDP goes up 5%. Maybe that lowers the UE rate 2 percentage points. The highest UE rate was 10.1% for any month. So I think the most optimistic estimate would have been to keep it at 8.1%