Sunday, 23 March 2014

Three dangerous economic ideas

My latest post at Forbes considers what happens when policy makers persist with policies whose underlying economic theory has been shown to be wrong*:
This post by Alex Marsh got me thinking. If economic ideas influence policy makers, what happens when the economic ideas turn out to be wrong?
This is not an idle question. Recently there have been three examples of economic ideas that have had huge impact on policy – and that have subsequently been shown to be false.
Read on here.

* Of course some people will argue that the three economic ideas I have identified are not wrong - it is the research debunking them that is wrong.

2 comments:

  1. "The absence of the banking sector in macroeconomic models meant that economists failed to notice the excessive growth of bank credit that led to the financial crisis."

    It also means that no consideration of automatic stabilisers for private bank credit takes place instead we have ex post amelioration as the following article discusses:-

    http://www.washingtonmonthly.com/magazine/march_april_may_2014/features/free_money_for_everyone049287.php

    You are already familiar with Paul Meli's attempt at creating an automatic stabiliser in the shape of a private credit ratio limit since you commented on his method of calculation:-

    http://economicsrantsnmusings.blogspot.com/2013/06/does-credit-drive-economy.html

    http://mikenormaneconomics.blogspot.com/2013/11/mark-buchanan-actually-economists-can.html

    https://dl.dropboxusercontent.com/u/33741/FGEXPND.png

    Now two American professors Atif Mian and Amir Sufi seem to be suggesting in their forthcoming book "House of Debt" and a paper by Sufi that Indexed House Mortgages or Risk Sharing Mortgages could be one way to moderate the reckless supply by private bankers of house mortgage credit. I assume this automatic stabiliser would be one way in the sense that if house prices fall then so will mortgage repayments and any use of indices might be regional:-

    http://www.amazon.com/House-Debt-Recession-Prevent-Happening/dp/022608194X/ref=sr_1_1?ie=UTF8&qid=1395239261&sr=8-1&keywords=House+of+Debt

    http://www.kansascityfed.org/publicat/sympos/2012/sufi.pdf

    So whilst Meli's ratio proposal deals with general credit Mian and Sufi's proposal is targetted. Given that the bulk of private bank credit and profit is for house mortgage credit the latter proposal covers the main potential economy destabilising factor. I would be interested in your comments both general and specific on the role of automatic stabilisers and these two specific ideas.

    ReplyDelete
  2. I think the BoE document will help people who want to know about the monetary system

    ReplyDelete