debunking economics - supplement

Debunking economics The Naked emperor deThroNed? supplemeNT

Steve Keen

Zed BooksLondon | new York

This supplement to Debunking Economics Revised and Expanded Edition: The Naked Emperor Dethroned? was first published in 2011 by Zed Books ltd, 7 Cynthia street, london N1 9 jf , uk and room 400, 175 Fifth avenue, New York, Ny 10010, usa The first edition of debunking economics was first published in the united kingdom and the united states of america in 2001 by Zed Books ltd, and in australia by pluto press australia ltd. www.zedbooks.co.uk/debunking_economics www.debunkingeconomics.com www.debtdeflation.com Copyright steve keen 2011 The right of steve keen to be identified as the author of this work has been asserted by him in accordance with the Copyright, designs and patents act, 1988 artwork by philip armstrong set in monotype plantin and FontFont kievit by ewan smith, london all rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise, without the prior permission of Zed Books ltd.

supplemeNt | 316 14 12 10

Inflation

Unemployment

Percent1 us inflation and un employment from 1955

8 6 4 2 0 -2 -4 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

16 14 12

Pecent of GDP2 Bernanke doubles base money in five months

10 8 6 4 2 0 1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

300

250

Percent of GDP

200

1930 level

150

100

3 private debt peaked at 1.7 times the 1930 level in 2009

50

0 1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

4 | debuNkiNg ecoNomics20 18 16 14 Utils 12 10 8 6Utils Change in utils

4 rising total utils and falling marginal utils from consuming one commodity

4 2 0 1 2 Bananas 3 4

5 Total utils from the consumption of two commodities

03 2 Bi sc2

Utils 8 16

24

3

1 uit s

1

0

na Bana

s

0

0

Utils 8 16

24

2.46 Total utils repres ented as a utility hill

1.8 Bi

sc

1.2 uit s

1.8

2.4

3.0

0.6

0

0.6 0

1.2

B

as anan

supplemeNt | 5

Utils 8 16

24

2.4

1.8 Bi

sc

1.2 uit s

1.8

2.4

3.0

0

0.6

0 0

0.6

1.2

nas Bana

7 The contours of the utility hill

3

2.7 20

Biscuits 1

17 .2

0

8 Indifference curves: the contours of the utility hill shown in two dimensions3

.8 13

0

1 Bananas Z X Biscuits

2

Y W Bananas

9 a rational con sumers indifference map

6 | debuNkiNg ecoNomicsZ X Biscuits B

D

10 Indifference curves, the budget constraint, and consumption

Y W C Z X A Bananas

Biscuits B

Y11 deriving the demand curve

q1

q2 I

q3 II III Bananas

W

Price of Bananas

p1

p2 p3

q1

q2

q3

Bananas

supplemeNt | 7Z Y X B Biscuits

q1

q2 q3

12 upwardsloping demand curve

A

Bananas

Price of bananas

p3 p2 p1

q1 q2 q3

Bananas

Z

Biscuitsa

X

c

Y

AC

B

a

W

c

b

13 separating out the substitution effect from the income effect

Bananas

8 | debuNkiNg ecoNomicsa) Necessity b) Inferior

All other goods

Bananas c) Luxury d) Neutral

Bananas

14 engel curves show how spending patterns change with increases in income

Bananas

Bananas

I

Biscuits

II

III

15 straightline engel curvesBananas

1200

Price and marginal revenue

900

Marginal revenue

600

16 economic theory cannot rule out the possibility that a mar ket demand curve may have a shape like this, rather than a smooth, downwardsloping curve

300

Marginal cost

0

Demand

-300 0 100 200 300 400 Bananas 500 600 700 800

supplemeNt | 98000 7000 Thousand dollars 6000 5000 4000 3000 2000 1000 Monopoly profit Profit 0 5000 10000 15000 20000 25000 Total revenueMaximum profit Monopoly quantity

Total cost

17 profit maximization for a monopolist: marginal cost equals marginal revenue, while price exceeds marginal cost

0 Output 1200 1000 800 Dollars 600Monopoly quantity

De

Marginal cost

m

an

dc

ur

ve

Monopoly profit

Monopoly price

l na gi e ar u M ven re

400 200 0 0

Average costMonopoly cost

5000

10000

15000

20000

25000

Output

18 profit maximization for a perfectly com petitive firm: marginal cost equals marginal revenue, which also equals price

Firm revenue, cost and profit80000 70000 60000 Dollars 50000 40000 30000 20000 10000 0 0 50 100 150 Firm output 200 250Total revenue

qPC

Total cost Maximum profit ProfitPC Profit

The procedure: 1 Market sets equilibrium price 2 Price taking firm sets marginal revenue equal to marginal cost 3 Profit maximized

The firm1000 800 Dollars Dollars 600 Demand 400 200 0 0 5000 10000 15000 Market quantity 20000 25000 PPC QPC 1000 800 600 400 200 0 0 50

The firmqPC

Supply

Marginal cost Competitive price

100 150 Firm output

200

250

10 | debuNkiNg ecoNomics(a) Marginal cost D1 D2 (b)

Price

Price

S1

S2

S1

S2

Marginal cost

D2 D1 MR1 MR2 Quantity

19 a supply curve can be derived for a competitive firm, but not for a monopoly

Quantity

The market1200 1000 Dollars per unit 800 600 400 200 0 Marginal revenue 0 5000 10000 15000 Output 20000 PPC Price PM QM QPC Marginal cost (Supply)

20 a competitive industry produces a higher output at a lower cost than a monopoly

25000

The competitive firm1000 800 Dollars per unit Billions dollars 600 400 Price = Marginal revenue 200 0 0 50 100 150 Firm quantity 200 250 Marginal cost qPC 8 7 6 5 4 3 2 1 0 0

Market revenue, cost and profit levelsQM QPCTotal cost

Total revenueMaximum profit

Profit

5000

10000 15000 Output

20000

25000

a) Perfect competitionPrice Price Supply

b) MonopolyMarginal cost

21 The standard supply and demand explanation for price determination is valid only in perfect competition

Pe

Pe Demand Demand Marginal revenue Qe Quantity Qe Quantity

supplemeNt | 11

Farm (a) Area 1 square mile Fence 4 miles long

22 double the size, double the costs, but four times the output

Farm (b) Area 4 square miles Fence 8 miles long Four times the area; twice the fencing cost

1200Monopoly prediction

1000 800 Price 600 40023 predictions of the models and results at the market level

Monopoly outcome 100 firms prediction 100 firms outcome

Marginal cost

Marginal revenue Demand

200 0 0 5000 10000 15000

20000

25000

Output

140

Neoclassical120

Firm 1

Firm's output

Mean100

KeenFirm 280

24 output behavior of three randomly selected firms

Firm 360 0 20 40 Iterations 60 80 100

12 | debuNkiNg ecoNomics40000

Keen36000

Firm 96

32000

Firm's output

Average of all firms28000

Firm 7624000

Neoclassical

25 profit outcomes for three randomly selected firms

20000

Firm 66

16000 0 20 40 Iterations 500 5 60 80 100

400

Output 000s

300

3

200

2

26 product per additional worker falls as the number of workers hired rises

100

Marginal product

1

0 0 200 400 Labor 600 800

0 1000

1000

800

600

Labor

400

200

27 swap the axes to graph labor input against quantity

0 0 100 200 Output 300 400 500

Marginal product 000s

Output

4

supplemeNt | 131200

Total cost and total revenue 000s

1000

800

Total revenue600

400

Total cost28 multiply labor input by the wage to convert Yaxis into monetary terms, and add the sales revenue0 100 200 Output 000s 300 400

200

0

1200

300

1000

Total revenue

200

Total cost and revenue

800

100

600

Total cost

0

400

-100

Profit/loss200 -200

0 0 100 200 Output 300 400

-300

1000

20

Workers hired times wage

800

16

600

12

Total variable cost400 8

200

Marginal cost

4

0 0 100 200 Output 300 400

0 500

Marginal cost30 deriving marginal cost from total cost

Profit/loss29 maximum profit occurs where the gap between total cost and total revenue is at a maximum

14 | debuNkiNg ecoNomics20 Price 16 Average fixed cost Average variable cost

Marginal cost

12

Marginal cost

8

31 The whole caboodle: average and marginal costs, and marginal revenue

4

0 0 100 200 Output 300 400

Price

Supply

Demand Quantity

Total cost revenue

32 The upwardsloping supply curve is derived by aggregating the marginal cost curves of numerous competitive firms

Reta To l co sts b ria Va le co stsFixed costs Wheat output Average costMarginal revenue

33 economic theory doesnt work if sraffa is right

Average cost & revenue

Marginal cost qmin Wheat output

ve

nu

e

supplemeNt | 15Price/ bushelDq2 Dq3 Dq1 ? ?

Supply ?

Price?

34 multiple demand curves with a broad definition of an industry

Q1 Q 2 Q 3 Quantity?

Wheat

500

400

Sraffa output

300

Output

Neoclassical output200

35 a farmer who behaved as economists advise would forgo the output shown in the gap between the two curves

100

0 0 200 400 600 Labour input 800 1000

100

100 minus unemployment rate90

Percent

80

Capacity utilization70

36 Capacity utilization and employment move together

60 1967 1971 1975 1979 1983 1987 1991 1995 1999

2003 2007 2011

16 | debuNkiNg ecoNomics

Price/bushel

De

m

an

d

Equilibrium price

Supply

37 Costs determine price and demand determines quantityEquilibrium quantity Wheat

Average costAverage cost & revenue

38 a graphical representation of sraffas (1926) preferred model of the normal firm

Price

Marketing costs

Target markup Marginal cost

Wheat output

Target output

Output

A

C

B Labor

39 The economic theory of income distribution argues that the wage equals the marginal product of labor

Marginal product/Real wage

Mar gin al p rod uc to flReal wage

or ab

A

C

B Labor

supplemeNt | 17Wheat output

40 economics has no explanation of wage determination or anything else with constant returns

Labor input with constant labor/land ratio

Marginal product/Real wage

Marginal product of labor

Real wage

Revenue from sales

Labor

Labor

Price

Marginal revenue

Demand Quantity

41 The demand for labor curve is the marginal revenue product of labor

Marginal revenue product/Real wage

inal rev arg enu M e

pr od uc t

RW1 RW2

or lab of

E1

E2

B Labor

18 | debuNkiNg ecoNomicsIncome W3 y3 W2 y2 W142 The individuals incomeleisure tradeoff determines how many hours of labor he supplies

y1 h 3 h2 Leisure h1 Work Time (24 hours)

Income

W2 W1 h3 h 2 h 1

W2 W1

43 an upwardsloping individual labor supply curve

24-h2 24-h1 24-h3

Wage

Supply

Demand44 supply and demand determine the equilibrium wage in the labor market

Labor s

upply

W3

Wage

Labor

supplemeNt | 19Wage

Supply Wm We

Demand

Ld

Le

Ls

45 minimum wage laws cause unemploymentLabor

Wage

Supply

Wp Wa

Demand

46 demand management policies cant shift the supply of or demand for laborLf Income Labor

W3

W2 y3 y2 W1 y1 h1 Leisure h2 h3 Work

47 Indifference curves that result in less work as the wage risesTime (24 hours)

20 | debuNkiNg ecoNomicsW3 Wage Labor supply

W3 Income

W2 W148 labor supply falls as the wage rises

W2 W1

h 1 h2 h3 Leisure

Time (24 hours) Work 24-h3 24-h2

Hours 24-h1

W3 W3 Income Wage

Labor supply

W2

W2

49 an individual labor supply curve derived from extreme and midrange wage levels

W1

W1

h1Leisure

h2

h3Work

24-h3

24-h2 24-h1

Hours

Wage

Demand Supply

We Wm

50 an unstable labor market stabilized by minimum wage legis lation

Le Ldm Lsm

Labor

supplemeNt | 21Wage

Equilibrium wage? DE3 DE1

DE2 ? ? ?

Labor supply

Demand for labor

51 Interdependence of labor supply and demand via the income dis tributional effects of wage changesE1 E2 E3 Labor Equilibrium employment?

Output

Capital

Price

Profit rate

52 The rate of profit equals the marginal product of capitalQuantity

Marginal revenue product of capital

PR1 PR2

C1

C2

Capital

22 | debuNkiNg ecoNomicsProfit rate

Supply

53 supply and demand determine the rate of profit

Demand

Capital

0.3

Actual profit rate

0.2

0.1

54 The wage/profit frontier measured using the standard commodity

0.0 0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Wages (fraction of surplus)

Price

Supply

P2 P1

D2

55 standard neo classical comparative staticsQ1 Q2

D1

Quantity

supplemeNt | 23X displacement X with .01% different Y

5 X displacement56 sensitive dependence on initial conditions

0

-5

0

10

Time

20

30

Z displacement 16.0 24.0 8.01057 unstable equilibria

Y

.0 di 5.0 sp la 0.0 ce m -5 en .0 t

-4.0

X dis

0.0 place

4.0 ent m

8.0

Employment rate and wages as a fraction of output

1.1

1.0

0.9

0.8

58 Cycles in employment and income shares

0.7 0

Employment rate 10 20 Years 30

Wages share 40 50

24 | debuNkiNg ecoNomics1.1

1.0 Wages share

0.9

0.8

59 a closed loop in employment and wages share of output

0.7 0.85 0.87 0.89 0.91 0.93 0.95 0.97 0.99 1.01

Employment rate

I (income)

60 derivation of the downwardsloping Is curve

Savings

iInterest rate

Investment a function of interest rate

I (income)

Savings a function of income

Ix = S(I)

iIS cu rve

Multiplier

x

I

=

C(

i)

Ix (Investment)

I (output)

supplemeNt | 25Interest rate Interest rateExogenous money supply The LM curve

61 derivation of the upwardsloping lm curve

Md2 (I2) Md1 (I1) Money I1 I2 Income

LM

Interest rate

IS

62 reconciling keynes with the Classics

Keynesian region

Classical region

I (output)

10 9 9 9 9 9 9 9 9 99 6 l 6 6 9 6 6 66 9 6 u u6 66 6 6 66 6 6 66 6 66 6 66 666 9 66 66 69 6 96 9 9 6 9 9 66 9 6 999 9 9 6 9 6 9 99 66 s 9 666 9 9 9 66 9 9 99 9 9 966 66 6 9 9 99 9 99 96 96 99666 66 99 6 9 6 666 9 6 966666666 6 6 9 66 9 6 6 6 966666 9 9 999 99 9 6666 6 9 99 66 6 9 99 9 99 99 9 9 99 6 66 99 99999 9 966 9 9 99 9 9 99 99 9 9 99 9 9 99 6 19601970 l Jan 1970 u Lucas 9 9 -5 2 3 4 5 Unemployment 6 7 8 19501960

5

Inflation0

63 unemployment inflation data in the usa, 195072

s

June 1972

26 | debuNkiNg ecoNomics15 9 H 9 9 9 9 9 9 9 n 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 99 9 9 9 99 9 9 9 9 9 9 9 9 9 9 9 9 9 9 99 9 9 9 9 9 9 9 9 9 9 99 666 666 l 9 6 999 9 96 6 6 6 u u 9 6 6 6 6 99 6 6 6 9 9 66 9 9 6 6 6 6 9 6 66 6 6 6 66 9 9 9 6 9 9 6 6 96 9 9 66 999 6 6 9 99 6 s 9 9 66 9 6 9 66 6 9 9 9 6 6 6 6 6 6 6 69 9 6 9 9 66 6 6 96 9 69 6 6 69 6 6 6 6 6 6 6666 6 69 9 6 6 6 6 69 6 6 6 69 6 6 6 6 6 6 9 9 9 96 2 4 6 Unemployment 8 10

10

Inflation5

64 unemployment inflation data in the usa, 196080

0

6 9

19601972 19721980

l s

Jan 70 Jun 72

u n

Lucas Jan 75

H

Jan 80

Rate of interest

Supply

65 supply and demand in the market for money

Demand

Quantity

Risk

Capital market line

66 The capital market linePure interest rate Expected rate of return

supplemeNt | 27

Risk (r)

I Z C D B II III

IOA

C

F

67 Investor preferences and the investment opportunity cloudExpected rate of return (ER)

(r)

C* F B* G C B

IO

C

A A* P (ER)

68 multiple investors (with identical expectations)

(r) Z

A

IO

C

B

C

P

69 Flattening the IoC(ER)


8

Change in M0

4

Percent

0

-4

-8

70 Inflation and base money in the 1920s

Inflation1925 1926 1927 1928 1929 1930 1931 1932

-12 1924

20

Grey area indicates periods of recession

10

Percent p.a.71 Inflation and base money in the postwar period

0

-10

-20 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

12

8

Percent p.a.

Nominal4

0

72 Bernankes massive injection of base money in Qe1

After inflation-4 2005

2006

2007

2008

2009

2010

2011

supplemeNt | 2930 0

Unemployment20 6

10

Percent p.a.

0 18 -10

Change in M124

73 Change in m1 and unemployment, 192040

-20

-30 1920

1922

1924

1926

1928

1930

1932

1934

1936

1938

30 1940

30

Change in M020

Change in M1

Percent p.a.

10

0

-10

74 Change in m0 and m1, 192040

-20 1920

1922

1924

1926

1928

1930

1932

1934

1936

1938

1940

0.5

0.4

0.3

0.2

75 m0m1 correlation during the roaring Twenties

0.1 -12 -8 -4 0 Lag in months 4 8 12

Percent

12

30 | debuNkiNg ecoNomics0.6

0.4

0.2

0.0

-0.2

76 m0m1 correla tion during the Great depression

-0.4 -12 -8 -4 0 4 Lag in months 8 12 16

120 100 80

Percent p.a.77 Bernankes quantitative easing in historical perspective

60 40 20 0 -20 1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

120 100

12 10

Change in M0 percent p.a.

60 40 20 0 -20 2002

6

Inflation rate

4 2 0 -2 2011

78 Change in m1 and inflation before and during the Great recession

2003

2004

2005

2006

2007

2008

2009

2010

Inflation percent p.a.

80

Change in M0

8

supplemeNt | 312500

M02000

$ billion

1500

M1

1000

Currency

500

79 The money supply goes haywire

0 2007

2008

2009

2010

2011

10 Percent change 4th qtr to 4th qtr 8 6 4 2

Actual growth

Target range

80 lindsey, orphanides, rasche 2005,p. 213

1976

1977

1978

1979

16 14 12

M3

Ratio to M0

10 8 6 4

M2

M1

81 The empirical money multiplier, 19602012

2 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010


30

M0

20

M1M 2 M1

Percent p.a.

10

0

82 The disconnect between private and fiat money during the Great recession

-10

Private debtM 3 M2

-20 2008

2009

2010

2011

Growth of output 30 Wage Share 25 Output 20 15 10 5 0 0 20 40 Year Employment Cycle 0.95 0.90 0.85 Wage Share of Outut Employment Rate 60 80 100

Employment-Wages Share Cycle 1.0 0.9 0.8 0.7 0.6 0.85 0.90 0.95 Employment

Wage Share Cycle 1.0 0.9 0.8 0.7 0.6

0

5

10

15 20 Year

25

30

0

5

10

15 20 Year

25

30

83 Goodwins growth cycle model

supplemeNt | 33A Great Moderation? 500 400 Output 300 200 100 0 5 10 15 Year 20 25 30 1000 Output (billion) 800 600 400 200 250 260 270 280 Year 290 300 Followed by a Breakdown

Employment Cycle with Debt Wage Share of Output Employment Rate 1.0 0.9 0.8 0.7 0.6 0 50 100 150 Year 200 250 300 0.9 0.8 0.7 0.6 0

Wage Cycle with Debt

50

100

150 200 Year

250

300

84 my 1995 minsky model

0.9

Wages

0.8

0.7

85 Cyclical stability with a countercyclical government sector

0.6

0.86

0.88

0.90

0.92 Employment

0.94

0.96

0.98


120

Percent

100

Ratio80

60

Exponential fit

86 australias private debttoGdp ratio, 19752005

40 1980 1985 1990 1995 2000 2005

300

60000

250

50000

Debt ratio percent of GDP

200

40000

150

30000

100

Debt level

20000

50

10000

87 us private debt

0 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

30

0

Debt financed demand20 2

Percent of GDP

10

4

0

6

-10

8

88 The correlation of debtfinanced demand and unemployment

-20

Unemployment rate

10

-30 1970

12 1975 1980 1985 1990 1995 2000 2005 2010

U-3 unemployment rate

Debt level US$ billion

Debt ratio

supplemeNt | 350.8

Correlation coefficient

0.6

Employment

0.4

GDP

0.2

89 Correlation of credit impulse and change in employment and Gdp

0 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12

20 16 12

Average 19552008

Percent p.a.90 relatively constant growth in debt

8 4 0 -4 -8 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

30

20

Percent of GDP91 Growing level of debtfinanced demand as debt grew faster than Gdp

10

0

-10

-20 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

36 | debuNkiNg ecoNomics20 15 10 5

19992011

Percent p.a.

0 -5 -10 -15

19201940

92 Change in nominal Gdp growth then and now

-20 -25 0 2 4 6 8 10 12 14 16 18 20 Years since 1920 and 1999 25 20 15 10

19201940

Percent p.a.

5 0 -5 -10

19992011

93 real Gdp growth then and now

-15 -20 0 2 4 6 8 10 12 14 Years since 1920 and 1999 16 18 20

20 15 10

Percent p.a.

199920115 0 -5 -10

19201940

94 Inflation then and now

-15 0 2 4 6 8 10 12 14 16 18 20 Years since 1920 and 1999

supplemeNt | 3730

25

19201940

20

Percent

15

U-6 rate 19992011

10

5

19992011

95 unemployment then and now

0 0 2 4 6 8 10 12 14 Years since 1920 and 1999 16 18 20

200

50000

150

19201940

40000

$ billion

100

30000

1999201150 20000

96 Nominal private debt then and now

0 -10 -8 -6 -4 -2 0 2 4 6 8 10

10000

190 180 170

19992011

19201940

Index start value = 100

160 150 140 130 120 110

97 real debt then and now

100 90 0 2 4 6 8 10 12 14 Years since 1920 and 1999 16 18 20

$ billion


19992011250

Percent of GDP

200

19201940

150

98 debt to Gdp then and now

100 -10 -8 -6 -4 -2 0 2 4 6 8 10 Years relative to peak debt (1929 and 2009) 20

15

10

Percent p.a.

5

19201940

0

-5

99 real debt growth then and now

19992011-10 -10 -8 -6 -4 -2 0 2 4 6 8 Years after private debt growth stopped (1930 and Jun 2009) 10

160 140 120

Business

Finance

Percent of GDP

100 80 60 40

Households

100 debt by sector business debt then, household debt now

20 0 1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

supplemeNt | 3910 5 0

Percent of GDP

-5 -10 -15 -20

19201940

20002011

-25 101 The Credit Impulse then and now -30 -10 -8 -6 -4 -2 0 2 4 6 8 10 Years after credit impulse hit zero (1928 and Jun 2008) 30 0

20

Unemployment rate

5

Percent of GDP

10

10

0

Debt financed demand

15

-10

20

-20 102 debtfinanced demand and unemploy ment, 192040 -30 1921

25

30 1924 1927 1930 1933 1936 1939

30

0

Debt financed demand20 5

Percent of GDP

10

10

Unemployment rate0 15

-10

20

103 debtfinanced demand and unemploy ment, 19902011

-20

25

-30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

30

U-6 unemployment rate

Unemployment rate

40 | debuNkiNg ecoNomics10 -90

5

-30 0 30

Percent of GDP

0

-5 60 -10 90

Unemployment104 Credit Impulse and change in unemployment, 192040-15

120 150

-20 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932

180

10

-90

5

-30 0

Percent of GDP

0

Unemployment-5

30 60

-10

90 120

105 Credit Impulse and change in unemployment, 19902010

-15 150 -20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 180

-0.2

Correlation coefficient

-0.4

-0.6

-0.8

106 The Credit Impulse leads change in unemployment

-1 -12 -8 -4 0 4 8 12 Lag in months (with quarterly data)

% change in U-3 unemployment rate


-60

% change in U-3 unemployment rate


-60

supplemeNt | 41

107 a nineteenthcentury private banknote

100

Loans80

60

$40

Vault20

108 a credit crunch causes a fall in deposits and a rise in reserves in the banks vault

0 0 2 4 6 8 10 Years 12 14 16 18 20

100

80

Firm deposits60

$40 20

Worker deposits0 0 2 4 6 8

Safe10 Years 12 14 16 18 20

42 | debuNkiNg ecoNomics6 5 4 3 2 1 0 Bank bailout Firm bailout Worker bailout

109 a bank bailouts impact on loans

-1 10 12 14 16 18 20

40

30

Bank bailout Firm bailout Worker bailout

20

10

110 a bank bailouts impact on incomes

0 10 12 14 16 18 20

3.0

2.5

$ million p.a.

2.0 No bailout Bank bailout 1.5 Firm bailout Worker bailout 1.0 0 2 4 6 8 10 12 14 16 18 20

111 a bank bail outs impact on bank income

supplemeNt | 43120

100

80

Double repayment, half creation/recycling

60

$

40

112 Bank income grows if debt grows more rapidly

20

Standard values

0 0 2 4 6 8 10 Years 12 14 16 18 20

150 No bailout 140 Bank bailout Firm bailout 130

$120 110

113 loans grow more with a debtor bailout

100 10 12 14 Years 200 No bailout 195 Bank bailout Firm bailout 16 18 20

190

$/year114 profits do better with a debtor bailout

185

180

175

170 10 11 12 13 14 15 Years 16 17 18 19 20

44 | debuNkiNg ecoNomics6.00 No bailout Bank bailout 5.50 Firm bailout 5.25

5.75

$/year115 Bank income does better with a bank bailout

5.00

4.75

4.50 10 11 12 13 14 15 Years 16 17 18 19 20

10000

$/year116 modeling the Great moderation and the Great recession output

1000

100 0 10 20 30 40 Date 50 60 70

120 100

Workers80

Percent of GDP

60 40

Capitalists20

117 Income dist ribution workers pay for the debt

0 -20 0 5 10 15 20

Bankers25 30 35 40 45 50 55 60

supplemeNt | 4566 5

64

Finance profitsWages

4

62

3

60

2

58

1

118 actual income distribution matches the model

56 1980

0 1985 1990 1995 2000 2005

1.5 1.3 1.1 0.9 Random 0.7 0.5 0.3 0.1

119 lemming population as a constant subject to exogenous shocks

-0.1 -0.3 -0.5 0 20 40 60 80 100 Year 120 140 160 180

1.0 0.9 0.8 0.7 Formula 0.6 0.5 0.4 0.3 0.2

120 lemming population as a variable with unstable dynamics

0.1 0.0 0 20 40 60 80 100 Year 120 140 160 180

FIRE profits share of GDP

Wages percent of GDP

debunking economics - supplement

Documents