Neoclassical and Keynesian Economics in the News

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Creating Just Jobs Around the World – US News World Report – Oct. 31, 2013

This article discusses the inequality and joblessness in the global economy. It suggests that real sustainable growth strategies need to focus on domestic job creation. The article discusses a key neoclassical economic theme. That is rational behavior. Many firms have moved jobs overseas to avoid taxes and other regulations, as well as to exploit cheap labor. While this has myriad consequences, it remains in the rational interest of the firm, whose primary objective is profit maximization. The authors of the article are critical of this approach, stating that, “These trends do not bode well for the millions of workers across the globe, but they also adversely affect governments and businesses worldwide. A lack of good jobs and poor working conditions, and the resulting inequality fosters social unrest, political instability, and insecurity that can destabilize governments and create an uncertain business environment.” They put forward several alternatives, but the arguments in this article come directly from neoclassical economics.

Forced To Act – The Economist - Nov. 7, 2013

This article from The Economist discusses the European Central Bank’s decision to cut its main policy rate down to just 0.25% in response to low inflation rates. This is a record low for the ECB, and has many worried about the long term stability of the Euro. The article takes a Keynesian economic stance, focusing on the Central Bank’s monetary policy adjustment, which is a staple of Keynesian economics. Such a stance is evidenced by the suggestion that even more adjustment by the bank may be necessary to counter low inflation figures. It states, “The ECB may have acted today, but it is still not doing enough to counter weak inflation and to bolster what looks like a feeble recovery… Although it lowered the rate at which it lends to banks to 0.25% it left unchanged at zero the one it pays to banks on their deposits with the ECB. One option would be to charge a negative rate on them, making banks pay for leaving money with the central bank.” These types of policy interventions are central to Keynesian economics.

Economy Not as Strong as it Appears – CNN Money – Nov. 7, 2013

This CNN article explains that the recent GDP growth figures are deceiving. Even though the 2.8% annual growth rate in the third quarter is the highest in over a year, there are still underlying weaknesses in the economy such as overproduction, spending cuts on equipment by manufacturers, minimum wage increases, and continuing high unemployment numbers. This article takes a Keynesian stance, attributing production patterns to total consumer spending in the economy. This is an aggregate demand view consistent with the Keynesian approach. The article focuses on overproduction and states “Either businesses have good reason to expect demand will pick up in the future, so they stock their shelves in advance. Or, demand is weaker than they expected, and goods already ordered linger on shelves.” This suggests that production is driven by consumer demand, a decidedly Keynesian assertion. Furthermore, the article looks to consumer spending as a key indicator of recession and recovery, which is entirely in line with the Keynesian view.

UK’s Widening Trade Gap is Worrying – But Hardly a Shock – The Guardian, Nov. 8, 2013

This article from The Guardian contrasts a slowly recovering British economy and the relatively depressed rest of the Eurozone. Because the car industry in the rest of the Eurozone is producing above capacity, and because there is inadequate consumer demand for these automobiles domestically due to stagnant economic conditions, British demand has provided a ready market for these cars, keeping the European car industry artificially stable. Furthermore, the article mentions the downside of this relationship, namely a dwindling British manufacturing sector and a rapidly growing trade deficit. The article draws on both Keynesian and neoclassical economics. Its reliance on consumer demand as a prime determinate of production is thoroughly Keynesian. It reads, “Britain's biggest trading partner by far is the euro area, where domestic demand is extremely weak. Consumer spending here, by contrast, is recovering at a reasonably rapid lick, resulting in goods being sucked in from across the Channel. This trend has been especially marked in the car industry.” The article also relies on the neoclassical theory of the firm and comparative advantage to explain shifting production patterns across Europe. Using this theoretical base it warns, “The trade gap will widen further as consumption expands more rapidly than production.”

No, Austerity Did Not Work – Reuters – Nov. 8, 2013

This article is decidedly neoclassical in nature, railing against the austerity measures put in place around Europe to soften the effects of economic recession. The article explains that economic growth is needed to create jobs, which will increase aggregate spending, thus getting the economy moving again. Austerity in Spain, Greece, Germany, and other countries have prevented this kind of growth. It is neoclassical in nature because it is against government intervention and regulation, and instead suggests markets would be far more efficient, given time and space to function. The article states, “Feeble growth is not enough to create jobs and the labor regulation reforms that have accompanied austerity mean growth now has to be at somewhere between 1 and 1.5 percent before new jobs are created. To spur on job growth, labor-intensive industries like construction need to expand.” There is little evidence of that happening right now, and the article calls for an immediate end to austerity measures, and to heavy-handed regulation more generally. This sentiment is fully in line with neoclassical economics.

EU Weighs Up Curbing Greece State-Backed Trade Credit Insurance – Financial Times – Nov. 8, 2013

This article describes the debate over government-funded trade protections for Greece related trade. Such protection may be necessary since private insurers have backed out in the past few years due to the instability of the Greek economy. The article is neoclassical in nature, arguing that government protection is unnecessary, and that “Today the private market is perfectly capable of picking up that business.” The article argues that government intervention of all kinds has done more harm than good to the Greek economy. This is congruent with the neoclassical position that markets handle shocks with supply and demand naturally, and that government involvement will always be less efficient.

US, Europe Resuming Talks on New Trade Pact – The Economic Times - Nov. 11, 2013

This brief article provides an update about the ongoing trade talks between the United States and Europe. The new Transatlantic Trade and Investment Partnership would remove exchange barriers in sectors such as services, investment, energy, and raw materials. The talks are expected to continue throughout the week. This article takes a neoclassical economic stance, supporting the trade agreement on the grounds that it would allow the benefits of comparative advantage to be fully exploited. It claims that despite the recent government shutdown and reports of electronic espionage, “Officials for both sides say the benefits of the proposed Transatlantic Trade and Investment Partnership are too great for the talks to be affected.” Such an agreement could stabilize both economies by expanding market access for each, another necessary feature of neoclassical economic growth.

Is the US Economy Ready to Party? – CBS Money Watch – Nov. 11, 2013

This article from CBS News looks at the surprisingly high new jobs figures for the month of October, warning that one month does not make a trend and that full economic recovery may still be a ways off. It takes a traditional Keynesian look at the numbers, seeing consumer spending as the key component and most useful indicator of recession and recovery. This is evidenced by the worrying statement that, “Consumers remain skittish, spending is flat headed into the critical holiday shopping seasons.” The month of labor rebound though has many asking when the Federal Reserve will cut back on monetary stimulus. Monetary policy is, of course, a huge feature of Keynesian economics, and there are concerns that without such involvement from the federal government, employment and overall economic recovery would stagnate.

About 1-in-4 US Pumps Selling Gas Below $3 – The Wall Street Journal – Nov. 11, 2013

This article discusses the recent drop in average gasoline prices across the United States. The prices are the lowest since February 2011 and have been attributed to high supplies. This is simple neoclassical supply and demand economics, where a high supply results in falling prices until equilibrium is reached. The article states exactly that, “The national figure could approach the 2011 number by year-end amid high supplies and weaker crude oil prices, which are down $15 a barrel the past 2 months.”

Race to Bottom Resumes as Central Bankers Ease Anew: Currencies – Bloomberg – Nov. 11, 2013

This article covers a wide range of adjustments and interventions by central banks around the world in response to inflation, depreciation, trade deficits, and international interest rate fluctuation. The banks are all trying to keep their currencies strong with various monetary adjustments. These types of interventions are central to Keynesian economics, and examples of successes and failures of such adjustments are woven throughout this entire article. It is a very good example of the prevalence of Keynesian economics around the world.

Works Cited

Bird, David. "About 1-in-4 US Pumps Selling Gas Below $3." The Wall Street Journal. 11 Nov. 2013. <http://blogs.wsj.com/economics/2013/11/11/about-1-in-4-u-s-pumps-selling-gas-below-3/.

Charlton, Emma, and John Detrixhe. "Race to Bottom Resumes as Central Bankers Ease Anew: Currencies." Bloomberg. 11 Nov. 2013. <http://www.bloomberg.com/news/2013-11-11/race-to-bottom-resumes-as-central-bankers-ease-anew-currencies.html.

"EU Weighs Up Curbing Greece State-Backed Trade Credit Insurance." Financial Times. 8 Nov. 2013. <http://www.ft.com/intl/cms/s/0/a12e4da4-455f-11e3-997c-00144feabdc0.html#axzz2kMlIbjPf.

Elliott, Larry. "UK's Widening Trade Gap is Worrying - But Hardly a Shock." The Guardian. 8 Nov. 2013. <http://www.theguardian.com/business/economics-blog/2013/nov/08/uk-widening-trade-gap-worrying.

"Forced to Act." The Economist. 7 Nov. 2013. <http://www.economist.com/blogs/freeexchange/2013/11/ecbs-rate-cut.

Kurtz, Annalyn. "Economy Not as Strong as it Appears." CNN Money. 7 Nov. 2013. <http://money.cnn.com/2013/11/07/news/economy/gdp-summer/index.html?iid=SF_E_LN.

Shank, Michael, and Sabina Dewan. "Creating Just Jobs Around the World." US News World Report. 31 Oct. 2013. <http://www.usnews.com/opinion/blogs/world-report/2013/10/31/nations-should-focus-on-creating-safe-quality-jobs-around-the-world.

Sherter, Alain. "Is the US Economy Ready to Party?." CBS Money Watch. 11 Nov. 2013. <http://www.cbsnews.com/8301-505123_162-57611572/is-the-u.s-economy-ready-to-party/.

"US, Europe Resuming Talks on New Trade Pact." The Economic Times. 11 Nov. 2013. <http://economictimes.indiatimes.com/news/international-business/us-europe-resuming-talks-on-new-trade-pact/articleshow/25592494.cms.

Wapshott, Nicholas. "No, Austerity Did Not Work." Reuters. 8 Nov. 2013. <http://www.reuters.com/article/2013/11/08/us-wapshott-austerity-column-idUSBRE9A70Y720131108.