Sunday, May 23, 2010

Kling vs Cowen

Straight from the Kling:

Tyler Cowen writes,


This is the era of the rude economic awakening, and Greece is simply an extreme manifestation. The new European bailout plan is a denial of this truth rather than recognition of the new reality that a lot of countries, most of all Greece, aren't as rich as we used to think.

He has been riding this horse for quite some time. It is the sort of statement that resonates with non-economists' natural pessimism. That is, after a crash it is very tempting for people to believe that the previous prosperity was false. However, there is a good economic case for presuming that it is a recession that is an aberration, not prosperity. For example, a graph of long-term GDP growth shows a steady upward trend, to which we return even after severe recessions.

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My response, taking Cowen's side. Since the mid 70s, the value of the American economy was high as observed by our trading partners, the developing nations. They, seeing how the American economy worked, via the information revolution (world satellite), began trading into the American economy.

Global trade has equilibriated quite a bit, since then. Developing nations climbed the value ladder. If one looks at the spread of tradable goods, it has gotten more varied, spread out as time progressed and developing nations advanced. Hence, the observed relative value between developing and developed has equalized, a change accelerated by even newer, cheaper information technology.

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