Zombie Economics Review

My review of Zombie Economics by John Quggin

I enjoy reading books on Economics. Zombie Economics by John Quiggin (an Australian Economist) is a well-written book from an entertainment standpoint. Even the title is a little flashy, as is the book’s cover, zombies coming back to life. Its value is drawing people into the subject of economics; it noteworthy. However, it is beyond me how someone who has read and studied the history of economic thought like John Quiggin, can espouse some of the views about the way economics works.

However, I recommend you buy Zombie economics for light summer vacation reading with your e-reader.

You will like Zombie Economics  – If you are are a most left academic or part of the Hollywood crowd, when it comes to economic thinking, you will be nodding your head yes while reading this book. However, if you are a serious student of economic thought, chances are you will pass Quiggin off as another financial journalist who uses the subject propagate his personal views on politics in the language of economics.

Perhaps we all do this, including me. However, there is a big difference between myself and Quiggin; that is, although I only have a Master’s in Economics, I have to spend most of my life in the real economy rather than an academic ivory tower. Therefore I feel my views are a little more objective.

However, despite the fuzzy logic in the book, I enjoyed reading it. Right or wrong, he is an excellent writer if of commercial fiction. Further, I like to understand opposing points of view more than books that agree with my ideas. Economic books of opposing views challenge me rather than give me more information that supports my own somewhat libertarian views.

I can recommend Zombie Economics as long as you understand what it is, that is entertainment. It is also an argument against the paradigm of post-Keynesian thought. A subtle economic prescription to bring back to life some even older and more dangerous zombies from the past that are connected with government intervention and John Maynard Keynes.

The five central myth’s John Quiggin tries to dispel in Economics

1. Great moderation
2. Efficient Market hypothesis
3. Dynamic stochastic general equilibrium
4. Trickle-down economics
5. Privatization

There are elements of truth in Quggin’s arguments, but the big picture is off. He is trying to explain the financial crisis of 2007 in terms of a euphorically acceptance of economic ideas that lead to a policy that lead to the crisis. He paints a picture that people who believe in personal freedom and smaller, more responsible government are fringe.

For example, great economists from the Austrian school of economic thought like Hayek are labeled by Quiggin as extremist and fringe :

Members of the Austrian School, a fringe group on the right.”. And a political movement that wants to balance the budget is labeled as “right-wing fringe groups, such as the Tea Party movement in the United States which have opposed both the bailout.

I think the bailouts were a waste. I have no problem with a balanced budget. I do not know what he is talking about. Do you?

Throughout his book, Quiggin argues for a mixed economy. The word mixed or moderate gives people warm fuzzies, but in my book, it is another word for government-managed economics.

You can see Quiggins is more of an academic leftist that uses politically charged languages to convey a point. That is the financial crisis, and economic business cycles are caused because the government was not big enough. This is crazy.

I think the opposite. In fact, it would be better to eliminate the Federal Reserve, a government agency, and let the markets work. Sure the financial crisis was caused by the Central bank and its mismanagement policies. But the central bank is a government agency.

Privatization

Quiggin states how to market liberalism has been a central idea for more than thirty years in economics. He argues it is not always the optimal solution to replace the public sector with the private sector. He gives specific examples such as the British Rail track was renationalized in 2002. He further points out how the telecommunications industry has had mixed results with privatization. He is 100% wrong on this. Even his best examples have flaws, let alone the general rule.

My rebuttal is, I am sure John Quiggin has never lived in a post-socialist country as I do. I live in Poland, and the mantra is privatization. I have seen it with my own eyes that in every case from the phone company to rails, to large dinosaur companies are chopped up and sold off; the public gets lower prices, better service, cleaner facilities, and government shrinks.

There is no way he can convince me of someone who has lived a good part of his life in Eastern Europe that there is some optimal medium between public and private companies. Public companies are economic disasters; private companies are clean and cheap prices for consumers. Telecommunications is a prime example. Phones use to be so expensive, now every teenager has one and can SMS their friends. I do not even have a phone as I do everything on the Internet, in fact there is a free phone to landline numbers if you are smart you can find online.

The central idea behind Quiggin’s book is charming, and his writing style makes it worth buying, but me being a libertarian economist will respectfully disagree with his ideas.

This is a free competition. This is market liberalism – Clean trains with clean bathrooms that are now on-time, and you have friendly stewardesses remind you where you can plug in your laptop. In contrast, the state-owned trains had a disheveled grumpy man with an attitude collecting ticket on a dirty carriage, wherewith the heat was in overdrive or did not work. Quiggin lives in an academic ivory tower, not Eastern Europe.

Quiggin points out how New Zealand in the 1990s tried to privatize their hospitals, and it was a disaster. My rebuttal is I do not know how they did it, but I suspect it was not how Poland is doing it. Poland is successfully and slowly privatizing it’s hospitals. I think it was government officials who messed up the New Zealand system, rather than privatization that caused the problem.

For many successful privatizations, there may be one botched attempted, but if you drill down to the details, you will find the process of privatization was off, rather than the idea of private property does not work. I extend and an invitation to John Quiggin to live in Poland for a while and see if his economic views do not change fast. The only people who will give him an ear are people sitting in old dinners collecting communist pensions remembering the past days.

Zombie Economics is incorrect on the privatization argument. I could write a book on this. Almost without exception, anything the government does free market can do with high quality and lower price. Go to a museum of communism with your blackberry or iPhone, and you will get the idea.

Trickle-down economics

This is a cliché expression that left-wingers like to repeat. Market liberals do not base policy on anything like this. They defend personal freedom, but from a political economy, standpoint does not advocate trickle-down economics. It is more like all boats go up in a rising tide. If you try to make everyone equal, all will live at a lesser standard. Again communism. Zombie Economics by John Quiggin is way off on this.

Not in his idea mind you, he is correct, taxation should be progressive. Milton Friedman argued for a negative income tax, the ultimate form of progressive taxation. However, most people do not believe in trickle-down economics like he sets up in his argument. So it is more of a paper tiger.

Under standard assumptions about the way the economy works, all the benefits of additional investment go to those whose savings finance that investment. That is, cutting taxes for the rich may lead them to save and invest more, thereby making themselves still more productive, but there is no reason to expect any benefit for the rest of the community, except to the extent that the cost of the original tax cut is partially defrayed. – (Quiggin Zombie Economics page 157)

I agree with this statement. His book is filled with exciting statements like this, but I think he is missing the point. That is, the role of government is not to equalizes. We tried that under communism.

I do not think it is the role of government to try to make everyone and everything equal but more to protect our individual rights.

However, many people like Ron Paul believe an income tax has no place in a modern economy. I agree there are better alternatives like a tax on consumption rather than earnings.

Dynamic stochastic general equilibrium

Great chapter title full of economic jargon, but the theory does not hold. Basically, an academic argument that was around in the 1980s when I was at the University studying economics, that microeconomics was what is important.

The Global Financial Crisis – The obvious criterion of success or failure for a macroeconomic theoretical framework is that it should provide the basis for predicting, understanding, and responding to macroeconomic crises. If that criterion is applied to the current crisis, the DSGE approach to macroeconomics has been a near-total failure. – ( Zombie Economics by John Quiggin page 127).

Great thought-provoking material here. I will leave it to you to read his argument; however, the bottom line is, the Global Financial crisis was caused by a speculative bubble because the government was allowed to manage the supply of credit instead of the market. It is the government that was the problem, not Keynesian liquidity traps or threats misunderstanding of macroeconomics. It was government involved in something it should never have been involved in like sending interest rated to 1% after 9/11 so we all could go shopping again. Please read my posts on Wall Street and the causes of the Great Depression for a better explanation.

Reanimation” How Obama caused the Global Financial crisis – The crucial point in a good zombie movie is the moment when zombies who seem to have been blasted into the next world by the hero’s shotgun, pull themselves up from the ground and come shambling forward. In the writing of this book, that moment came for me when I read Casey Mulligan’s paper (2009) “Aggregate Implications of Labor Market Distortions: The Recession of 2008–9 and Beyond.” Looking at the way in which Real Business Cycle theorists have tried to write the Great Depression out of macroeconomic history, presenting it instead as a government-induced dislocation of labor markets, it is evident that, sooner or later, something similar would be attempted with the Global Financial Crisis. But the Great Depression revisionism did not take hold until the Depression had faded out of living memory, to the point where hardly any economists who had experienced it were still active. (Zombie Economics by John Quiggin page 133).

Efficient Market hypothesis

Quiggin writes:

The experience of the twentieth century suggests that a mixed economy will outperform both central planning and laissez-faire. The real question for policy debates is one of determining the appropriate mix and how the public and private sectors should interact. The economic doctrines derived from the Efficient Markets Hypothesis seemed to contradict that suggestion. It is now clear, however, that it is the Efficient Markets Hypothesis and not the mixed economy that has failed the test of experience.

I beg to differ. It was the mixed economy that got us into this mess. It created a market distortion.

Markets are not always efficient, but most are close enough to make the game enjoyable. My economic concentration was in corporate finance and area in which I worked; however, late at night when I was reading this chapter, I was a little lost in is logic. I am sure he was making a point, but this is the chapter I fell asleep on as for bedtime reading, I did not want to stop and think that hard.

Basically, he ignores the economic idea of a crowding-out effect. Markets are not always efficient, but the alternative is even worse. I wish I could go into more detail here.

Great Moderation

From 1985 on, there was a positive economic expansion. Zombie Economics by John Quiggin, I live in the 1970s a tough time economically and the 80s and 90s, which were reality smooth with some regular business cycles. I cannot entirely agree with his thesis here.

I agree with Quiggins that Greenspan and Bernacke were taking credit for this period of economic stability caused by primarily the end of the cold war and other global factors like technological advances. They proclaimed that with the magic want of manipulating short-term interest rates, monetary policy could bring economic stability.

It was not the fault of mismanagement of the Federal Reserve; it was that we have a Federal Reserve.

My review of Zombie Economics by John Quiggin

I wish I could do justice in this Review of Zombie Economics. I want I could go in more detail and debate him on every point in great detail, but that would be a book in itself. I would instead get your curiosity up and decide if you want to read the book. For me, it is fairly priced even if the scholarship was wrong. If you are undecided, I would say read it.

We should let the market’s work, even when they fail. They will fail when the government is involved in distorting something — for example, the Federal Reserve. Further correction should be to reduce the burden of government, not increase it. We have a big bailout party, and this rewarded who? No me, and now our children have to pay for it.

The bottom line is that even though I know it is commercial fiction or at least journalism, I can recommend this book if you are interested in economics. Why? Based on the writing style and being thought-provoking. However, it is not, in my view, factual, objective, or valuable in terms of advancing economics and counter to promoting the wealth of nations.

Therefore my Zombie Economics review by John Quiggin is this: good thought-provoking entertainment in a vibrant but accessible economic language, but false ideas from A to Z. Better will be to read a book of commercial fiction by Marshall and Jevons if you want to learn more about economics or continue to read my blog, of course, by subscribing.