Misconceptions about Austrian Business Cycle Theory

I'm very happy that ABCT is being talked about and debated these days, however, those who are critical of it (Brad DeLong, Paul Krugman, et al), get one thing wrong. The length and depth of the recession need not be explained by sectoral reallocation alone. DeLong has been particularly willful on leaving out this point. The ensuing panic caused by such misallocations (what Hayek called the secondary downturn), may and sometimes does have a much larger impact. In terms of MV=PQ, when people rush to hold cash and less risky assets, V drops. If M is not increased to counterbalance, this deflation can lead to a decline in Q, as P will not adjust immediately. This part of the recession occurs completely independently of the sectoral shifts.

The critics should acknowledge this, or at least acknowledge that Austrians acknowledge that magnitudes between boom and bust need not be symmetrical. Friedman dismissed the link between the bust and the preceding boom. Austrians link the two, but there need not be a 1-to-1 ratio in magnitudes.

I would use stronger language than Professor French

From Professor French:

After the fact it is easy to identify periods in which stocks did well and periods in which they did poorly. But if you want to use these "seasons" to build an investment strategy, you have to identify them before they occur - and that is not so easy.

I say that it is impossible to indentify such seasons. But then again, I take radical uncertainty seriously, unlike most mainstream economists.

Professor French's Nobel Prize odds

Many have suggested (including Dean Slaughter just this past spring) that professor French may someday end up with The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (the economic Nobel Prize). This is more than just Tuck marketing. Each time a short list of possibilities comes out before the award, Professor French is listed. This is due to his work on asset pricing that he has done with Eugene Fama. Last year, the two were running first and second odds-wise by the British betting firm Labrokes

However, I think there is now a snag. The current backlash against financial economics is not trivial and it is very clear to me that the award is often presented in a "faddish" way. Econ blogosphere is awash with financial economics critics. Felix Salmon, Dani Rodrik, Seeking Alpha, and most vocally Nassim Taleb are all critics of the innovations in financial theory and instruments from the past...lets call it 50 years.

Given the politicization of the award (why would you give the award to Hayek and Myrdal in he same year unless it was for political reasons?), I predict that we will have some non-finance awards for several years. Growth, Trade, Behavioral, and (boringly) Labor economics are probably all that will be on the table for legitimate consideration.

IRS agents tail UBS bankers, fake mustaches unconfirmed

This is getting a bit silly

US tax agents are tailing UBS bankers in an attempt to identify who their clients are to determine who may be evading taxes, a Swiss newspaper reported yesterday.US tax agents are tailing UBS bankers in an attempt to identify who their clients are to determine who may be evading taxes, a Swiss newspaper reported yesterday.

There is no doubt in my mind that the IRS would spend $200 million to recover $100 million in missing taxes. Given the costs of recovery, strained international relations, and revealed ineptitute, they might let this go. The optimal amount uncollected taxes is definitely non-zero.