Are Interest Rates Really That Important?

There is something I never got about interest rates. There is a consensus across economists that interest rates have a very important impact on the economy. Economists of all stripes agree that lower interest rates boost economic growth and higher rates reduce growth. Some go as far as saying that it is through interest rates and monetary policy (not spending and fiscal policy) that governments should manage the economy. It’s a standard classroom exercise to draw curves showing the impact of interest rates on growth. Too low interest rates are one of the main factors blamed for causing the bubble and resulting recession. But I always felt that something didn’t quite add up and I began to doubt how important interest rates really are. Continue reading “Are Interest Rates Really That Important?”

On The Road To Recovery Or The Road To Nowhere?

The government has been celebrating Ireland’s recent exit from the Troika bailout and have proclaimed that Ireland is now on the road to recovery. The Taoiseach addressed the nation to celebrate the regaining of Ireland’s economic sovereignty. But are we out of the woods yet? Is Ireland facing a new dawn that leaves the nightmare of the recession behind or is it only a mirage of false hope while we are still stuck in the mud? Continue reading “On The Road To Recovery Or The Road To Nowhere?”

Debunking The Broken Window Fallacy

One day a boy was playing football when he accidently broke a window. Rather than get mad, the people shrugged their shoulders and said breaking windows is good for the economy. After all, if no windows were broken, then all the glaziers would be out of a job. By breaking the window, the boy ensured money would be spent on repairs, thereby ensuring someone kept their job and giving the window making business a boost. However, at this point Bastist in his seminal essay “That Which Is Seen And That Which Is Not Seen” jumps in to point out why this is a fallacy. While we see the money spent on repairing the window, we don’t see what would have happened had the window not been broken. Instead of repairing the window, the money could have been spent on a new pair of shoes. So while the glazier is better off, we don’t see the people who are worse off as a result. Continue reading “Debunking The Broken Window Fallacy”

A Minsky-Fisher-Koo-Keynes Theory Of Boom And Bust

The financial crisis and recession has turned economic thinking on its head. Economic textbooks which presume recessions never occur and unemployment is a voluntary decision have failed to keep up. However, luckily there have been a group of economists who have created theories that describe the world as it really is, not as they wish it was. They took key insights from the Roaring Twenties and the Depression Thirties and individually developed theories for how the economy boomed and why it went bust. There is Hyman Minsky’s Financial Instability Hypothesis, Irving Fisher’s Debt-Deflation Spiral, Richard Koo’s Balance Sheet Recession and John Maynard Keynes theory of aggregate demand. Each explains a part of the business cycle, today I want to piece them altogether to create an overarching theory. Continue reading “A Minsky-Fisher-Koo-Keynes Theory Of Boom And Bust”

What Is Modern Monetary Theory?

The crisis has given rise to a range of new ideas and theories to replace the discredited view of the economy. The newest and most imaginative of these is known as Modern Monetary Theory (MMT) and is one of the first theories to owe its growth to the internet. Without a doubt MMT is radical and completely turns established economic thinking on its head. If it is correct then it would change the way we think about the economy forever.

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The Most Important Lesson Of Economics

Economics is a broad and vast field comprising intricate areas that would take years to master. This makes it very hard to summarise or reduce it to a simple point. However, if there was one simple lesson that I wished everyone knew about economics, one easy sentence or sound bite that could explain the essential core to people who know nothing else about economics, it would be: “My spending is your income”. This simple point, properly understood, explains everything you need to know about the important policy issues of the economy. It doesn’t explain everything, but it explains the important parts.

My Spending Is Your Income

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Why The Austrian Business Cycle Theory Is Wrong

One of the surprisingly popular theories as to why the recession occurred is known as the Austrian Business Cycle Theory (ABCT), which argues that not only is the government not the solution to the recession, but in fact, it is also the cause. It claims that the recession was caused by the government artificially lowering the interest rates and distorting the economy leading to a recession. As you can imagine this theory is very popular among libertarians eager for an excuse to absolve the market of blame for the crash. It is promoted by Ron Paul and Peter Schiff who claim to have predicted the Financial Crash (and the next one too). It is also completely wrong and dangerously so. Continue reading “Why The Austrian Business Cycle Theory Is Wrong”

The Failure Of Private Auditing

On this blog I often discuss market failures and the need for government action to correct them. It is necessary for regulation to keep the free market from getting too wild. But is government the right answer? Can the market not control itself? Could companies not bind together to create industry standards without government bureaucracy? Can private regulators not ensure proper standards are met without the need for state intervention? Continue reading “The Failure Of Private Auditing”

The Impossible Trinity

Most economic concepts are pretty dry, but the Impossible Trinity sounds like one of those dilemmas where you are in a burning house and can only save two out of three people. The term refers not to religion (that Trinity is impossible in its own way) but international trade and how governments can only two out of three options, each of which is desirable in its own way. The three options are fixed exchange rates, independent monetary policy and free movement of capital. If they don’t sound that exciting, they are crucial to understanding the crisis with the Euro and what we can do about it. Continue reading “The Impossible Trinity”

The Shame Of Unemployment

There are few things in life as soul-crushing and depressing as being unemployed. In our modern society, people are defined by their work; your job is who you are. Those without a job are therefore excluded from society and feel as though their very identity is in question. Words cannot fully express the overwhelming sense of shame and humiliation that the unemployed feel. Even in times of severe recession they still blame themselves. There is a severe stigma attached to unemployment that makes them outsiders in society. Unemployment is a social curse that robs people of their dignity and self-respect. Continue reading “The Shame Of Unemployment”