Free marketer supports central planning

‘The Economist’ must be embarrassed about its support for Central Bank loose-money policies which amount to manipulation of prices of all types of financial assets.

‘Free Exchange’ (a pro-stimulus, Keynesian blog) in ‘The Economist’ group site discusses a new paper that, yet again, holds up a mirror to the fallacies of the assumptions and theories that economists rely on. Judging by the hot air surrounding the critique of Rogoff-Reinhart by UMASS professors, it is unlikely to happen.

Reinhart and Rogoff penned a dignified response in NYT on the controversy. Some interesting links available in that Op.-Ed. Their Op.-Ed pointed to this interesting blog. They had done a very good analysis of the controversy and evaluated both the UMASS and R&R positions.

Amol Agrawal sent me this link to an interesting article on the Political Economy Research Institute (PERI) at the Univ. of Massachusetts. Good to see these closing remarks from the founder of PERI:

But the department’s radical openness to alternate perspectives still sets it apart. “Learn from Marx, learn from Keynes, learn from Hayek,” Pollin says. “One of the biggest influences on me personally was Milton Friedman. He was very engaged with real world questions, and he made no bones about his ideological predilections.” Have not read the Herndon-Ash-Pollin paper yet. Downloaded it.

My long piece in ‘Pragati’ on the controversy raked up by the UMASS trio is published. There is no need for ideology in economics. It is about people’s welfare. What works in one place might not work in another place. What worked in the past in the same place might not work later. Therefore, theory based rules must be few, general can only be broad guideposts. Fiscal intervention in the event of an externally induced (or, crisis induced) slowdown may be desirable, provided it does not impede real private sector adjustment that is needed to purge the prior excesses. Further, it must be targeted, minimal, time-bound and must have due consideration of long-term fiscal sustainability.

Jahangir Aziz in MINT poses a valid question:

Why did expectations come unhinged? Because RBI, too, till mid-2011, nearly 15 months after the inflation spike in early 2010, believed that supply constraints were the drivers of inflation and insisted on tightening policy at a glacial pace, showing none of the urgency that the 22 months of double-digit inflation over 2010-11 demanded. Add to that the government’s fiscal profligacy—it refused to withdraw the massive stimulus provided in 2008-09 despite growth flying at 8.6% and 9.3% in FY10 and FY11. With that kind of excess demand persisting for more than two years, households and firms rationally changed their beliefs, doubling their expectations about where inflation could and did reach.

The government,  in my view, is to blame, for it leant on the RBI not to kill the growth recovery. Indian government, to be rather generous to it, allowed itself to be seduced by double-digit growth rates. It was a demand surge and did not reflect a sustainable rise in the economy’s potential to deliver higher growth consistently. We are still paying the price for it and will continue to pay a price for it, for some more time to come.

T. N. Ninan’s column this Saturday in Business Standard and Jitendra Bhargava’s piece yesterday on the Jet – Etihaad deal are MUST-READS for they provide the clues as to we will be paying heavily and for quite some time to come.

Harsh Gupta pointed me to this development. After ‘hedonic’ adjustments that made the Consumer Price Index understate inflation, the United States is embarked on revisions to the computation of GDP with an intent to overstate it, perhaps. See the FT article on this.  Perhaps, to be fair ,I must go through this before commenting on it.

Yesterday’s U.S. first quarter GDP growth numbers disappointed market expectations. The second quarter must be even softer, going by recent economic real-time data and this. Rail traffic growth has clearly slowed to a crawl.

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