What did Hayek really think of deflation?

My comment on Mario Rizzo’s post attracted a lot of attention.  Some commenters (including Mario Rizzo) have suggested that I misunderstood Hayek’s views on deflation.  Perhaps he only favored deflation as a result of technological progress.  Or perhaps he was talking about the problem faced by Britain after it resumed the gold standard in 1925.

Here is Lawrence H. White commenting on a Hayek quotation from 1933:

Hayek (1933c, p. 176) worried that the process of readjustment after 1929 was being delayed by “the rigidity of prices and wages, which since the great war has undoubtedly become very considerable.” He blamed the rigidities for the magnified unemployment and thereby for the deflation (not mentioning the US banking crisis and monetary contraction in this context), but hoped that the deflation might restore price and wage flexibility the hard way:

 
 

 

“There can be little question that these rigidities tend to delay the process of adaptation and that this will cause a “secondary” deflation which at first will intensify the depression but ultimately will help to overcome these rigidities.”

A few comments:

1.  Wage rigidity was a problem in Britain throughout the entire interwar period.  They had persistently high unemployment for much the same reason that the eurozone has had high unemployment (relative to America) in recent decades.  Wage rigidity was not a big problem in the US until Hoover discouraged firms from cutting wages in the 1930s.

2.  White shows that Hayek thought deflation, in and of itself, was a bad thing (unless caused by technological progress.)  But in the early 1930s he was willing to accept deflation as a way of addressing what he thought was a greater evil–wage and price rigidity.

3.  Hayek’s preferred policy was NGDP targeting, which would actually call for inflation during a period of falling output.  Thus Hayek’s 1930s-era support for deflation was ad hoc–specifically aimed at the problem of rigidities.

4.  It is not correct to say that the abstract Austrian model, or Hayek’s preferred nominal target, is one that calls for deflation during a depression.  His early 1930s policy views went against his theoretical writings.

Just in case anyone thinks White and I have taken Hayek out of context, and that he didn’t really favor deflation during the early 1930s, then consider this statement from the 1970s:

 

I am the last to deny – or rather, I am today the last to deny – that, in these circumstances, monetary counteractions, deliberate attempts to maintain the money stream {NGDP], are appropriate.  I probably ought to add a word of explanation: I have to admit that I took a different attitude forty years ago, at the beginning of the Great Depression. At that time I believed that a process of deflation of some short duration might break the rigidity of wages which I thought was incompatible with a functioning economy. Perhaps I should have even then understood that this possibility no longer existed. … I would no longer maintain, as I did in the early ’30s, that for this reason, and for this reason only, a short period of deflation might be desirable. Today I believe that deflation has no recognizable function whatever, and that there is no justification for supporting or permitting a process of deflation.

Hayek was not dogmatic.  Perhaps he saw that the deflation of the early 1930s did not make wages more flexible; indeed governments reacted by making them more rigid.  In any case, Hayek consistently argued that NGDP targeting was the optimal monetary policy in a well-functioning economy, and late in his life he came to view it as also being the optimal monetary policy in a non-well-functioning economy.   As you know, that is also my view.  In that sense I am a Hayekian.  But in general I prefer his views on microeconomics to his writings on macroeconomics.

PS:  I just noticed that right before I posted this Mario Rizzo added a second comment to my earlier post.  I think we basically agree.  I share his concern that extended unemployment benefits may be increasing the unemployment rate.  As an aside, I’d like to revamp our UI system around private accounts.  If we must have the government involved during recessions, I’d rather any extra or extended benefits be paid out in lump sums, as that would make labor markets more flexible.


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26 Responses to “What did Hayek really think of deflation?”

  1. Gravatar of Greg Ransom Greg Ransom
    7. July 2010 at 09:31

    Note well, Hayek attributes this view about deflation and union to _Keynes_ and the _1920s_ in this interview:

  2. Gravatar of Greg Ransom Greg Ransom
    7. July 2010 at 09:32

    Note well, Hayek attributes the view quoted about deflation and union to _Keynes_ and the _1920s_ in this interview:

    http://www.youtube.com/watch?v=VqU-AZh-wqU

  3. Gravatar of Greg Ransom Greg Ransom
    7. July 2010 at 09:41

    What I have yet to find is a passage where Hayek actually said this in the 1930s:

    “would no longer maintain, as I did in the early ’30s, that for this reason, and for this reason only, a short period of deflation might be desirable.”

    He may remember thinking this — but note well in the first instance he remembers Keynes making this very arguments and agreeing with it.

    So Hayek isn’t making this argument, he is merely relating how he was persuaded by Keynes’ original argument.

    But I’m not sure where we find where Hayek himself made the argument.

    Does anyone have the cite were Keynes make the argument?

  4. Gravatar of Greg Ransom Greg Ransom
    7. July 2010 at 09:49

    Scott, is this based on any seriously reading or study of Hayek’s macroeconomics and monetary theory? Because I find most of the rhetorical attacks on Hayek’s macro come from people like Krugman, Keynes, Samuelson, Friedman and DeLong who demonstrably do not have any competence or understanding of it (which isn’t surprising, since we have no evidence that any of them read or studied Hayek’s work to non-superficial extent.)

    Scott writes:

    “But in general I prefer his views on microeconomics to his writings on macroeconomics.”

  5. Gravatar of Mike Sandifer Mike Sandifer
    7. July 2010 at 10:01

    Is your rather disfavorable view of unemployment compensation during recessions merely based on your view that nGDP should be maintained, hence making these benefits unnecessary?

  6. Gravatar of Greg Ransom Greg Ransom
    7. July 2010 at 11:09

    I’d suggest that White is a bit mislead, to this extent, Hayek shows in repeated interviews that he was thinking mostly in terms of the lingering problems IN BRITAIN which resulted from the continuing problems caused by the great deflation of 1925.

    He’s not thinking of “after 1929”, he’s thinking of “after 1925″, i.e. rigidities which remained in BRITAIN more than a half decade after the deflation.

    White writes:

    ” Hayek (1933c, p. 176) worried that the process of readjustment after 1929 was being delayed by “the rigidity of prices and wages, which since the great war has undoubtedly become very considerable.” ”

    On “Taking Hayek Seriously” I’m going to spend some weeks going through all of the various Hayek quotes on this matter, across the whole historical period, so all the facts are laid out for anyone interested in facts to see.

  7. Gravatar of David Stinson David Stinson
    7. July 2010 at 11:15

    Hi Scott.

    For what it’s worth, here’s my take.

    Hayek (and subsequent fractional reserve free bankers/monetary disequilibrium types) favour what he termed “monetary neutrality” as a policy objective. Monetary neutrality would be achieved by maintaining monetary equilibrium. Monetary equilibrium meant maintaining the left hand side of MV=PY (i.e., the product of MV) unchanged. With positive productivity growth, one has real growth and therefore P must fall. With negative productivity growth, RGDP falls and P must rise. I would suggest that, in the Hayekian world view, the changes in P in these two cases represent “deflation” (the former case) and “inflation” (the latter case) but only in the trivial sense, not in the policy-relevant sense. I would further suggest that, in the Hayekian world view, the policy-relevant definitions of deflation or inflation are those that result from monetary disequilibrium, i.e., the weighted average change in P plus the overall productivity change. Put another way, we have policy-relevant inflation (deflation) whenever NGDP growth is positive (negative).

    Of course, mainstream economists generally view “neutral” monetary policy differently in that they actually seek a desired level of monetary disequilibrium (or at least the movement from one equilibirum to another), as represented by the target inflation rate, non-zero NGDP growth rate, or whatever.

  8. Gravatar of JimP JimP
    7. July 2010 at 12:01

    Is this good or bad?

    http://blogs.ft.com/money-supply/2010/07/07/laws-of-the-fed/

    This seems to imply that Ben can get what he wants.

    Its bad if it means that, thus far, he has gotten what he wants.

    Its good if it means that he could go farther if he wanted to. But does he?

  9. Gravatar of Declan Trott Declan Trott
    7. July 2010 at 15:59

    “Wage rigidity was not a big problem in the US until Hoover discouraged firms from cutting wages in the 1930s.”

    I’m not sure about this – didn’t even Lee and Ohnihan say that wage behaviour under Hoover was pretty much the same as under Harding (ie nominal wages did fall, but not as much as prices)?

  10. Gravatar of Mario Rizzo Mario Rizzo
    7. July 2010 at 16:45

    Scott,

    I agree with your post. Nice to see a blog where progress in discussion can be made.

  11. Gravatar of Richard H. Serlin Richard H. Serlin
    7. July 2010 at 18:54

    Here are some interesting and potentially very important facts regarding Fed action and deflation:

    1) From Stephen Williamson:

    My previous post, point 1, reflects some ignorance on my part (the ignorance has now been corrected). The Federal Reserve Act specifies that decisions about the interest rate on reserves are made by the Board of Governors, not by the FOMC. Obviously Congress did not think through the issue properly when it amended the Act. Since the interest rate on reserves is now the key policy rate, decisions about how to set it would appropriately reside with the FOMC.

    at: http://newmonetarism.blogspot.com/2010/04/fomc-statement-part-ii.html

    2) From Scott Sumner:

    1. Interest on reserves was a big mistake and still is.

    2. If anything the rate should have been negative.

    at: https://www.themoneyillusion.com/?p=5893

    3) From the Telegraph (via Scott Sumner), June 25th:

    Ben Bernanke needs fresh monetary blitz as US recovery falters. Federal Reserve chairman Ben Bernanke is waging an epochal battle behind the scenes for control of US monetary policy, struggling to overcome resistance from regional Fed hawks for further possible stimulus to prevent a deflationary spiral.

    at: https://www.themoneyillusion.com/?p=5816

    Now given 1, 2, and 3 above there is this:

    There are currently five members on the Board of Governors. The Telegraph article claims Kohn is an ally. Tarullo was just appointed by Obama, so you’d think he’s pro-stimulus. That would give Bernanke a majority in a vote to cut the rate on bank reserves to zero, if not negative as Scott Sumner suggests, which could certainly cause those banks to discharge large amounts of excess reserves into the economy.

    Why doesn’t he do this?

    He doesn’t want to upset the Federal Reserve Bank Presidents? They all come up for re-appointment in 2011, and their re-appointments must be approved by the Federal Reserve Board. If any of those bank presidents threaten to retaliate, then Bernanke can threaten to use his majority on the board to not confirm them.

  12. Gravatar of Jon Jon
    7. July 2010 at 23:07

    Scott, thanks for this post. After you contradicted my claim, I did read White’s essay, and found him to agree with my estimation rather than disclaim it. And by read, I mean, with great strain, squinting at my iphone and becoming very annoyed at the bait-and-switch.

    It costs a good deal of credibility to not dismiss an Austrian outright, but nonetheless, a citation to White’s framing is a citation to the Austrian loyalists. So you’ve clearly taken a step out on a limb and put your trust in the chorus. Bravo.

    Perhaps part of the problem is that its too easy to misread the Austrians. Much of the older source material is translated to begin but the material is old, and the simple absence of the modern terms of art are a burden to careful reading.

    Sometimes you read the darnedest things. For instance, a comment from Mises critiquing Keynes for failing to overcome the arguments of Smith and Say. Seems ridiculous. We KNOW there can be excess demand for money. Say’s law is qualified. That was my reaction, shock at first. Yet in his earlier publications, Mises had carefully laid out notions of varying demand for money and necessity of meeting those demands which was part and parcel of his sound money preference–a steady price-level–indeed that 1912 publication that very clearly explains Keynes “great” contribution about the paradox of thrift.

    So what could Mises be saying? He’s actually denying the possibility that a liquidity trap could be realized, but that sure isn’t obvious. Given that we’ve never seen one, and that the terminology has surreptitiously been co-opted to describe any condition under which monetary policy ceases to be effective, its fair to say he isn’t obviously wrong.

    In 1952 Mises wrote an essay describing the phillips curve–an idea he attributes to Keynes, and which he describes precisely the hard won lesson of the 1970s: that the phillips curve relation depends upon background expectation of invariant inflation and that an anticipation of the deviation will neutralize the effect.

    Hopefully, this experience encourages you to do more first-hand readings and form more first-hand opinions.

  13. Gravatar of woupiestek woupiestek
    7. July 2010 at 23:42

    I don’t understand to P.S.: what is the UI system? The next sentence to miss a verb.

  14. Gravatar of scott sumner scott sumner
    8. July 2010 at 06:23

    Greg, I am simply quoting Hayek. If Hayek doesn’t know what Hayek really believes, there is not much I can do about that.

    Mike. It has nothing to do with NGDP. Extended UI raises the unemployment rate for any given NGDP.

    David Stinson, I agree about Hayek.

    JimP. I definitely think Bernanke could do more. But if he is not a forceful personality he may not want to ram things through over significant opposition. I wish he was more forceful.

    Declan, I thought they said exactly the opposite, that wages fell faster under Harding. In any case, wages did fall much faster under Harding.

    Thanks Mario.

    Richard, I made a similar point to Williamson last year.

    Regarding Bernanke’s power, see my answer to JimP. I have an open mind on the issue, but tend to think that Bernanke does have enough power, but seeks consensus before moving.

    If the 3 hawks were all pushing for the Fed to buy another $800 billion in MBSs, the Fed would have done it already. Their views are powerful, in my view.

    Jon, This latest post reflects the same view of Austrian economics that I have been putting forth from day one. but I am glad to hear that you liked it.

    I do not believe that disequilibrium in the money market can explain deviations from Say’s law. In my view the problem is sticky wages and prices. I.e., it is easy to explain why NGDP changes, the problem is in explaining why changes in NGDP cause changes in RGDP.

    Woupiestek. Thanks for pointing out the typo. It is unemployment insurance system.

  15. Gravatar of Doc Merlin Doc Merlin
    8. July 2010 at 06:50

    re: unemployment.
    There is new evidence arising that unemployment has more to do with barriers to entry for new firms than just about anything else.

  16. Gravatar of Jon Jon
    8. July 2010 at 07:58

    Scott, writes: “the problem is in explaining why changes in NGDP cause changes in RGDP. ”

    I’m afraid I don’t follow your subtext. Are you saying that’s due to price stickiness or not?

  17. Gravatar of Grreg Ransom Grreg Ransom
    8. July 2010 at 08:07

    Context is all — you aren’t relating “what Hayek believed” if you mislead your audence about the context and fail to provide it or if you don’t report the inconsistences between the historical record and 45 year old off-the-cuff recollections.

    Also, Keynes supported the idea that deflation would break union power in Britain and would solve the uncompetitive wages problem — are you going to suggest Keynes isn’t worth considering as a macro theorist because of this opinion, everyntime the topic is Keynesian economic.?

    and again, what you say here is you typical “argument by muddle”, conflating facts about beliefs across the historical record with false and confused and unreliablee self-reconstructed memories from the distant passed.

    I’ve seen you do this “argument by muddle” again and again (e.g. muddling theoretical construct with empirical judment with policy judgments) .

    Are you self-aware of this habit?

    Is it intentional?

    “Greg, I am simply quoting Hayek. If Hayek doesn’t know what Hayek really believes, there is not much I can do about that.”

    If you were consistent you will.

  18. Gravatar of David Stinson David Stinson
    8. July 2010 at 09:16

    Scott said:

    “I do not believe that disequilibrium in the money market can explain deviations from Say’s law. In my view the problem is sticky wages and prices. I.e., it is easy to explain why NGDP changes, the problem is in explaining why changes in NGDP cause changes in RGDP.”

    I’m confused (again).

    Isn’t monetary disequilibrium the thing that prices aren’t adjusting to when they’re being sticky? In other words, excess demand for money can either be eliminated by price changes, in the first instance, or, if prices are sticky, by quantity adjustments. In either case, it is the monetary disequilibrium that is ultimately the causal factor.

    In fact, isn’t it your argument that monetary disequilibrium (in the form of mistakenly contractionary monetary policy) caused the meltodwn in the fall of 2008 with effects on RGDP?

  19. Gravatar of Richard H. Serlin Richard H. Serlin
    8. July 2010 at 11:21

    “I have an open mind on the issue, but tend to think that Bernanke does have enough power, but seeks consensus before moving.”

    Ok, but here’s the big question:

    Why is it so important to have consensus?

    If the only way you can do great good for the country is to not have consensus, to instead ruffle some feathers on the FOMC, then why is it more important to not upset a handful of people than to do great good for the economy? What’s the reason? Can these people hurt Bernanke’s goals a lot later if he outvotes them now? And if they try can’t he threaten to not confirm these bank presidents in 2011, and act on that threat?

    What logical reason would Bernanke have to let a desire for consensus stop him if he wants to optimize the good he does for the country?

    One possibility: He thinks that he can get what he wants with consensus, which would be better over the long run, if he just waits a little, so the opponents on the FOMC see things decaying and will then be willing to act. But I’m not really sure this is a good reason. He can make his own long run by not confirming the harmful governors in 2011 if they continue to stop help.

    He has a majority on the board and the board controls the governors through the decision on whether to confirm them every four years. If he just uses this why would he ever need consensus?

    The desire for consensus can mean rarely, if ever, doing any good when there are few if any ways way to compromise with extremely harmful opposition that won’t just result in something that’s harmful or extremely harmful.

  20. Gravatar of Greg Ransom Greg Ransom
    9. July 2010 at 09:02

    In the professional judgment of Bruce Caldwell, Hayek’s intellectual biographer, Hayek’s memories of the past are routinely inconsistent, and often erroneous — simply not to be trusted without verification and not to be understood without explication.

    I’ve come across Bruce saying this more than once, about multiple Hayek “recollections”. Famously, Hayek explains “why he didn’t attack Keynes” after the General Theory about 6 different ways — but in fact Hayek did attack Keynes and the GT in his _The Pure Theory of Capital_ and Hayek simply forget the fact.

  21. Gravatar of Greg Ransom Greg Ransom
    9. July 2010 at 09:03

    Scott writes,

    “Greg, I am simply quoting Hayek. If Hayek doesn’t know what Hayek really believes, there is not much I can do about that.”

    Actually, there is. You can actually study the scientific work you are attacking, and the details of the historical period you are writing a book about.

  22. Gravatar of scott sumner scott sumner
    9. July 2010 at 16:43

    Doc Merlin, Was there a massive increase in the barriers to entry for firms right at the point where NGDP plunged in late 2008?

    Jon, Yes, I can’t think of any other plausible reason.

    Greg, You said;

    “Also, Keynes supported the idea that deflation would break union power in Britain and would solve the uncompetitive wages problem “” are you going to suggest Keynes isn’t worth considering as a macro theorist because of this opinion, everyntime the topic is Keynesian economic.?”

    That’s a non-sequitor. When did I ever suggest Hayek wasn’t worth considering as a macro theorist because of his views on breaking wage rigidity? In many ways I prefer Hayek’s macro to Keynes’ macro.

    David Stinson, I guess you could use the term that way. I suppose I think of disequilibrium as a situation where the demand for money doesn’t equal the supply, and people would prefer to hold different cash balances from what they are actually holding. But you are right, many theorists do call my views “monetary disequilibrium.” I don’t care about terms, as long as the ideas are clear.

    Richard, Those are good questions. From the very beginning of this blog I have been torn between the view that Bernanke would prefer a more dovish policy, and the view that he is doing exactly what he wants. I see good arguments for both sides.

    Greg#2, You said;

    “In the professional judgment of Bruce Caldwell, Hayek’s intellectual biographer, Hayek’s memories of the past are routinely inconsistent, and often erroneous “” simply not to be trusted without verification and not to be understood without explication.”

    But in this case his recollection is exactly consistent with the quotation from 1933 provided in White’s article.

    You said;

    “You can actually study the scientific work you are attacking”

    I am not attacking scientific work that I have no read. So I deny the charge.

  23. Gravatar of Greg Ransom Greg Ransom
    9. July 2010 at 18:15

    Scott, here below is the full set of remarks that White took one sentence from. You can make of it whatever you will.

    But you can’t be honest if you don’t take into consideration this.

    In the 1960s, 1970s, and 1980s Hayek says flat out that his understanding the facts on the ground in America were completely wrong concerning the state of the money supply in America in the 1930s.

    This shouldn’t be a surprise, as Hayek had abandoned empirical work, was up to his eyeballs in theory, teaching & editorial work, and he was living in Britain at the time, and the extent that he thought about policy, everything we have in terms of publications and interviews shows him focused exclusively on British problem, post the 1925 deflation.

    (Hayek’s knew knowledge came from Friedman and Schwartz’ landmark study.)

    Here’s Hayek in 1933, in the introduction to the English translation of his 1929 book on money and the trade cycle:

    “And since, in all my English publications, I have purposely
    refrained from combining purely theoretical considerations
    with discussions of current events, it may be useful to add here one or two remarks on the bearing of those considerations on the problems of today.

    It is a curious fact that the general disinclination to explain the past boom by monetary factors has been quickly replaced by an even greater readiness to hold the present working of our monetary organization exclusively responsible for our present plight.
    And the same stabilizers who believed that nothing was wrong
    with the boom and that it might last indefinitely because prices did not rise, now believe that everything could be set right again if only we would use the weapons of monetary policy to prevent prices from falling.The same superficial view, which sees no other harmful effect of a credit expansion but the rise of the price level, now believes that our only difficulty is a fall in the price level, caused by credit contraction.
    There can, of course, be little doubt that, at the present time, a deflationary process is going on and that an indefinite continuation of that deflation would do inestimable harm. But this does not, by any means, necessarily mean that the deflation is the original cause of our difficulties or that we could overcome these difficulties by compensating for the deflationary tendencies, at present operative in our economic system, by forcing more money into circulation. There is no reason to assume that the crisis was started by a deliberate deflationary action on the part of the monetary authorities, or that the deflation itself is anything but
    a secondary phenomenon, a process induced by the maladjustments
    of industry left over from the boom. If, however, the deflation
    is not a cause but an effect of the unprofitableness of industry, then it is surely vain to hope that by reversing the
    deflationary process, we can regain lasting prosperity. Far from following a deflationary policy, central banks, particularly in the United States, have been making earlier and more far-reaching 6 Prices and Production and Other Works
    efforts than have ever been undertaken before to combat the
    depression by a policy of credit expansion””with the result that
    the depression has lasted longer and has become more severe
    than any preceding one.What we need is a readjustment of those
    elements in the structure of production and of prices that existed before the deflation began and which then made it unprofitable for industry to borrow. But, instead of furthering the inevitable
    liquidation of the maladjustments brought about by the boom
    during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.
    It is very probable that the much discussed rigidities, which
    had already grown up in many parts of the modern economic system before 1929, would, in any case, have made the process of readjustment much slower and more painful. It is also probable that these very resistances to readjustment would have set up a severe deflationary process that would finally have overcome those rigidities.To what extent, under the given situation of a relatively rigid price and wage system, this deflationary process is perhaps not only inevitable but is even the quickest way of bringing about the required result, is a very difficult question, about which, on the basis of our present knowledge, I should be afraid to make any definite pronouncement.
    It seems certain, however, that we shall merely make matters
    worse if we aim at curing the deflationary symptoms and, at the
    same time (by the erection of trade barriers and other forms of state intervention), do our best to increase rather than to decrease the fundamental maladjustments. More than that: while the advantages of such a course are, to say the least, uncertain, the new dangers it creates are great.To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection””a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end. It would not be the first experiment of this kind that has been made.We should merely be repeating, on a
    much larger scale, the course followed by the Federal Reserve System in 1927, an experiment that Mr. A.C. Miller, the only economist on the Federal Reserve Board and at the same time its oldest member, has rightly characterized as “the greatest and boldest operation ever undertaken by the Federal Reserve System,”an operation that “resulted in one of the most costly errors committed by it or any other banking system in the last 75 years.” It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.We must not forget that, for the last six or
    eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.
    We cannot hope for the overthrow of this alluringly simple theory until its theoretical basis is definitely refuted and something bettersubstituted for it.”

  24. Gravatar of Doc Merlin Doc Merlin
    10. July 2010 at 06:25

    ‘Doc Merlin, Was there a massive increase in the barriers to entry for firms right at the point where NGDP plunged in late 2008?’

    Yes quite a few actually:
    1. the bailouts, specifically. They increased the spread in borrowing costs between small and large firms in favor of larger firms. This penalizes newer growing firms, amd harms their growth.
    2. For housing, new EPA regs made a lot of new requirements for new licenses, training and such for building renovations.

    However, a lot of the problem was that the startup->IPO model was all but destroyed by SarbOX, so companies had to rely on debt financing instead of equity financing. When debt markets froze up (in part because of NGDP problems) new job creation also froze up. Also, the bailout raised the spread in borrowing costs for small corps, and now because of SarbOx, new firms are having trouble financing. Combine that with the fact that smaller firms contribute most to net job creation, it causes serious problems.

  25. Gravatar of ssumner ssumner
    10. July 2010 at 06:29

    Greg, That long quotation is 100% consistent with what I said.

  26. Gravatar of ssumner ssumner
    11. July 2010 at 09:36

    Doc Merlin, I don’t see how bailouts would cause a crash, and I don’t think EPA regulations would have that big an effect. The problem was in manaufacturing, not housing, in late 2008.

    That is an excellent point about Sarbox, which was an awful bill. I wish I knew more about that area.

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