Munich Personal RePEc Archive Cause and cure of the crisis Colignatus, Thomas Samuel van Houten Genootschap 14 September 2014 Online at https://mpra.ub.uni-muenchen.de/58592/ MPRA Paper No. 58592, posted 17 Sep 2014 04:43 UTC Cause and cure of the crisis Thomas Colignatus September 14, 2014 Speech for the annual convention of the Samuel van Houten Genootschap, the scientific bureau of the Sociaal Liberaal Forum, Scheveningen, Tortuga Beach Club, August 23 2 14 (edited) JEL A00, P16 Abstract The wel are state was created a ter 1950 with counterproductive mechanisms and this caused high in lation and high unemployment and stagnating growth by 1970, called stag lation. Since 1970 governments redressed the wel are state but did not succeed in inding wor)able mechanisms. They rather ought stag lation with the ideology o the day, shi ting rom vulgar Keynesianism irst to monetarism and then to neoliberalism, and now +muddling through,. The deregulation o inancial mar)ets seemed to solve stag lation but only repressed it and resulted into the crisis since 2007. The return o regulation also causes the return o stag lation- what was repressed be ore now is into the open again. .e-regulation is re0uired indeed but the undamental cure lies in ocussing on wor)able mechanisms or the wel are state. .eturn to the 19th century laisse1- aire will generally be re2ected. I economic management had made better use o the available in ormation then these policy errors could have prevented. A mi4ed economy re0uires a constitutional Economic Supreme Court to monitor the 0uality o in ormation or policy ma)ing. Keywords 5reat Depression, 5reat Stag lation, 5reat 7oderation, stag lation, in lation, unemployment, Phillipscurve, poverty, subsistence, minimum wage, labour mar)et, wel are state, mi4ed economy, social security, productivity, ta4, insurance, ta4 void, regime switch, Keynes, vulgar )eynesiansim, iscal policy, monetarism, monetary policy, neoliberalism, regulation, deregulation, inancial crisis, economic crisis, muddling through, repressed stag lation, Economic Supreme Court, Trias Politica, Tessera Politica, 8ational Investment 9an), economic cycle, counter-cyclical, economic structure, Euro1one, euro, gold standard, iat money, European Central 9an), EC9, no bail-out, national debt, ban) balance sheet, global warming 1 Contents Introduction ................................................................................................................................ 3 The need or a long view in history ........................................................................................ 3 The impact o a regime switch ............................................................................................... 3 Stag lation is the shi t o the Phillipscurve.............................................................................. 3 The rise o stag lation 1950-1970 .............................................................................................. 4 The wel are state is necessary against unemployment and poverty ..................................... 4 Ta4es ; premiums and the ta4 void due to the minimum wage ............................................ 4 Increase o the ta4 void due to di erential inde4ation............................................................ 5 Ta4 disincentives and partial or total derivatives ................................................................... 5 .educed orm model, prediction and con irmation ................................................................ 5 Other causes have their in luences but should not distract ................................................... 5 Policy advice .......................................................................................................................... 5 Vulgar Keynesianism, monetarism, neoliberalism, muddling through 1970-2014 .................... 6 Ideologies and ailed solution approaches............................................................................. 6 How 'supply side'-deregulation actually stimulated demand.................................................. 6 7ins)y 7oment and 7uddling Through................................................................................. 6 The cure 2014+.......................................................................................................................... 6 The current structure o policy ma)ing causes highly unreliable policies .............................. 6 Counter-cyclical national development and investment ban)s.............................................. 7 Economic co-ordination, nationally and internationally.......................................................... 7 Arom Trias Politica to Tessera Politica with an Economic Supreme Court ........................... 7 Can the world trust economic science B ................................................................................ 7 Economic science warned about stag lation and about the euro .......................................... C Protecting the 0uality o in ormation or policy ma)ing .......................................................... C 7oney ; ban)ing and the euro.................................................................................................. C 7onetary policy in the current crisis....................................................................................... C Incentives rom who owns the Central 9an).......................................................................... C The euro, the mechanisms o the gold standard, the optimal currency area......................... 9 Dsing iat money as a policy instrument ................................................................................ 9 Some )ey points or a summary ................................................................................................ 9 Conclusion ............................................................................................................................... 10 .e erences............................................................................................................................... 11 2 Introduction The need or a long view in history The events since 2007 have caused economists and governments to ocus on the inancial sector, monetary policy and national debt. This is reasonable to a large e4tent since mar)et con idence is ragile and attention or appropriate regulation is surely appropriate. There are limits to what can be achieved however. It is also necessary to loo) at iscal policy, investment and labour. In these areas the tendency e4ists to ta)e a historical outloo) o only a couple o decades, say to the period o president .onald .eagan 19C1-19C9 who is thought to have created the oundations and president Clinton 1993-2001 when the world economy seemed to do well. Instead, we must loo) urther bac) to the rise o the wel are state since 1950 and the endemic stag lation that this caused since 1970. The crisis teaches us, again a ter the 1930s, that regulation is needed. In retrospect regulation was an important actor or the rise in wel are since 1950. The deregulation in 19C0 thus was a wrong e4periment, much guided by political rhetoric. Ehat alternative was overloo)ed B In the ollowing we will start in 1950 and then discuss the various phases, and conclude with the current situation. The impact o a regime switch The economic system can be sub2ected to regime switches. The same mechanisms can wor) out a bit di erently depending upon the regime. Aor the whole OECD, the period 1950-1970 can be seen as the incubation and the period 1970-2014+ can be seen as the Great Stagflation. The crisis since 2007 can be seen as 2ust another phase in that overall history o stag lation. The speci ic issues in money and ban)ing that are relevant or 2007+ cannot solve the underlying issue o the 5reat Stag lation since 1970. The 0uestion is not only what to do 2ust now, but rather also what would have been the right analysis in 1970. Ehen we understand the causal relations in the regime switch then we can identi y the general cure since 1970 that is also relevant today. The solution approaches since 1970 that got us here in act contained errors, as shall be discussed below. Stag lation is the shi t o the Phillipscurve The term stagflation was coined by DK 7P Iain 7acleod in a speech in the DK Parliament in 1965. The conventional idea at that time was that in lation and unemployment could be traded o , notably along a stable schedule called the Phillipscurve. This stability bro)e down a ter 1965 with both high in lation and high unemployment, and subse0uent stagnating growth. Stag lation thus is a shi t o the Phillipscurve rom avourable to un avourable combinations o in lation and unemployment. Some i not most economists nowadays hold that there cannot be any relationship between in lation and unemployment, since the data are all over the plots. However, conceptually, prices respond to mar)et slac)s and shortages, wages responds to unemployment and vacancies, and wages orm a part o the consumer prices. There is more stability once we understand the true mechanisms Fincluding e4pectations and 8AI.D o course). Economists and governments could have solved the problem right then and there and the world would have been 0uite di erent. However, economists and governments were blind to the proper analysis and they embar)ed on policies that have sent the world economy on a roller coaster since 1970. Also the chance provided by the analysis in Colignatus F1990) was missed.