What, me worry? Naaaah :(

Richard Posner summarizes the state of the economy:

The United States has a deeply wounded economy. At this writing, transfer payments by the government to individuals and families (Social Security, unemployment benefits, tax credits, etc.) exceed the taxes being collected from the household sector. At the same time, private investment net of depreciation is negative. This means that private savings are being borrowed by the government, combined with the government's foreign borrowing, and then transferred to households to enable them to maintain their accustomed level of consumption. People are saving more, but government borrowing overwhelms their saving, with the result that aggregate saving -- public plus private -- is negative. So: negative savings, negative private investment, an incredible ratio of household debt to disposable income (1.25 to 1, though down from 1.39 to 1 in 2007), massive government borrowing to finance private consumption -- not a nice combination.

I so wish that I had no intellectual or personal interest in these topics.  The ignorance would have made my life so much better!

Anyway, Posner continues with his assessment, and it is more of stuff that should keep us awake night after night:

it is small consolation that fiscal imprudence is bipartisan. The parties play leapfrog when it comes to spending. From the standpoint of economic policy, the United States has only one party, and it is the party of profligacy.

Anne Applebaum says that she has seen America's future and it is damn "Greecy":

Fortunately for American politicians, we do not have to submit our financial statistics to a European Commission, and thus we do not have to lie about them outright. But aside from our very large budget deficit—at the moment, 9.9 percent of GDP and climbing—we also have liabilities that are rarely acknowledged. The costs of Medicare and Medicaid are going up, as is the cost of veterans care. Markets assume that the vast debts of Fannie Mae and Freddie Mac are underwritten by the government, and someday the government might be called upon to pay them. No one is lying about these things, but no one is talking about them very much, either.

The good news is that the American government's bankruptcy is not on the front pages, and it won't be for many years: Our sheer size, our entrepreneurship, and our relatively open business culture will keep us going for a long time. But the Greek crisis shows that the combination of debt and political deadlock can be deadly. The catharsis we feel as we watch it unfold—that Aristotelian combination of pity and fear—should shock us far more than it has so far.

Quote of the day: Richard Posner on the state of the economy

We simply cannot responsibly gauge the pace of the recovery. Nor is it even clear whether we are better off with a fast recovery or a slow one. A fast recovery could create an acute risk of dangerously high inflation. A slow recovery could greatly increase the size of the federal deficit, threatening all sorts of economic and political harms, with eventual unacceptable inflation only one of them. I am particularly concerned with the danger of social and political turmoil if high unemployment and related economic pathologies persist. We are now in the third year of a depression. The economic crisis continues to occupy center stage despite all the other news assailing us.

Am glad that the prolific Posner is returning to blog at the Atlantic.  Boy is he a one-man-writing-machine!  BTW, I wonder if his economics colleagues at Chicago have resumed talking with him :)  In case you are wondering what I am talking about, here is the New Yorker piece.

American economics profession failed the US

Like many people, in academe and otherwise, I am most interested in how the economics profession, theory, and education will change as a result of this Great Recession. My hypothesis is that economics education, starting from the ECON 101 classes, will barely change at all. After all, academia is notoriously slow-paced when it comes to any change.

But, shouldn't economists acknowledge that they goofed up. Big time? Shouldn't the American Economics Association issue a mea culpa of sorts?
Here is Richard Posner on this topic:

In modeling the business cycle, economists not only ignored, because difficult to accommodate in their mathematical models, vital institutional detail (such as the rise of the "shadow banking industry," which is what mainly collapsed last September)--often indeed ignoring money itself, on the ground that it doesn't really affect the "real" (that is, the nonfinancial) economy. They also ignored key concepts in Keynes's analysis of the business cycle, such as hoarding and uncertainty and business confidence ("animal spirits") and worker resistance to nominal (as distinct from real) wage reductions in depressions. Lessons of economic history were ignored, too, leading to a belief that there would never be another depression, let alone a collapse of the banking industry. Even when the collapse occurred, in September, many macroeconomists denied that it would lead to anything worse than a mild recession; the measures that the government has taken to recover from what has turned into a depression owe little to post-Keynesian economic thinking; and the economists cannot agree on what further, if anything, should be done, and which of the government's recovery measures has worked or will work.

Besley and Hennessy's letter, when first published, was described in some quarters as a letter of "apology" by English economists. It was not that; nor is the August 10 letter--the latter is a denunciation of mainstream economics.

The notion of a profession's apologizing for its failure in a letter to the monarch is charming, however. It would be an apology to the nation, personified in its monarch. The English monarch does not exercise political power, but does personify the nation, and it is easier to write a letter to a person than to a nation.

The English economics profession failed the United Kingdom; the American economics profession failed the United States. Not that the profession should be equated to its macroeconomic and financial divisions. The study of business cycles is only a small part of modern economics. Other areas of economics bear significantly on the study of business cycles, such as labor economics, without being implicated in the failures of response to the current crisis. But the control of the business cycle had until the present crisis been regarded as a principal triumph of modern economics and justification for regarding economics as the queen of the social sciences. We have no monarch; the President is not a personification of the nation but rather the head of the national government; there is no one to write the letter of apology to. No matter. The urgent need is for the part of the profession that concerns itself with business cycles to acknowledge its inadequacies and reorient its training and research.

Understanding the Great Recession

A special session at the annual meeting of the AAG was devoted to Paul Krugman's Nobel, and what that meant for economic geography. There one of the panelists recalled his encounter with Krugman years ago. The panelist finished his talk at a seminar when he was a visiting professor somewhere in Europe (I forget the name exact location.) It turned out that Krugman was also there at the same time. When it opened up for Q/A, apparently Krugman mocked that the research that the panelist presented was nothing but simple anecdotes for the edification of undergraduates.
That reminded me of the time when I was in graduate school--I came across an essay where the economist Robert Solow had written a damning critique of my adviser's essay. True to my nature, I brought this up with my adviser, who said something like, "oh, where he knocked me on my head?"

I suppose it is rare for a super-genious to be gracious to others. Many others, like Larry Summers, are also notorious for such behaviors. But then, hey, it takes all types of people to make up this planet :-)

In the NYRB, Solow has a critique of Richard Posner's latest book, A Failure of Capitalism: The Crisis of '08 and the Descent into Depression. An interesting review for many reasons. In wrapping up the essay, Solow writes:

The problem is rather that Panglossian ideas about "free markets" encouraged, on one hand, lax regulation, or no regulation, of a potentially unstable financial apparatus and, on the other, the elaboration of compensation mechanisms that positively encouraged risk-taking and short-term opportunism. When the environment was right, as it eventually would be, the disaster hit.

Like I am going to disagree with Solow and get knocked on my head! :-) Seriously, there is nothing to disagree here. In reaching this ending, Solow has lots of wonderful explanations for the crisis, and dissects Posner for sloppiness. It was interesting to note how Solow threaded in Posner's book on Public Intellectuals: A Study of Decline.

In his book on public intellectuals, Posner blames the decline of the species on the universities and their encouragement of specialization. I may be acting out that conflict. Remember that even hairsplitting is not so bad if what is inside the hair turns out to be important.

Ouch! That is the Solow knock on Posner's bald head! Oh, the sentence just before that quote? "his grasp of economic ideas is precarious" . Hilllaaarious .... :-)