Archive for the ‘Capitalism Reform’ Category

crazy consumption and really gross domestic product

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The opinion polls seem clear enough. In six months Britain will have a Conservative government armed with a mandate to scale back the state with immediate effect and all Labour can do between now and next spring is prevent heavy defeat becoming a wipeout.

While this may prove to be true, it is curious nonetheless. David Cameron has been amazingly successful at shifting the political battle onto his own ground; he has disguised a strategically weak position with tactical elan. Labour has done the opposite; it has allowed a strong strategic position to be nullified by the darts and feints of the opposition.

Let me explain. Cameron’s main argument – that the economic mess we are in is the result of the failing of big government – is the precise opposite of the truth. The reason for the crisis was not that the state was too active, but that it was too passive. For three decades, from the mid-1970s onwards, regulations on finance were relaxed, markets were unshackled, taxes were cut.

Paul Davidson, in his new book The Keynes Solution, puts it this way: “During almost all of the last four decades the public debate over economic policy has been dominated by the belief that if self-interested individuals are permitted to operate in a free market without government interference and regulation, and without worrying about other members of the community, the resulting free market will bring the economy to nirvana.”

Keynesian schadenfreude

Market fundamentalism has been found wanting these past two years. The economics profession has stood aghast as, one by one, its sacred cows – self-correcting markets, rational expectations, efficient markets hypothesis – have been slaughtered. Keynesians (and Marxists, to be fair) haven’t had so much fun in years; far from waiting for the invisible hand to work its magic, governments stepped in to prevent banks from failing, the financial system from imploding and the global economy from collapsing.

Only once in the entire crisis has a government opted for a “nature’s cure”, and when Hank Paulson let Lehman Brothers go to the wall in September last year, he unleashed four weeks of mayhem in the financial markets that only started to abate when governments took stakes in tottering banks in return for capital injections.

Even so, the near-death experience for the banks had an immediate and profound impact on the real economy. Credit lines dried up and confidence collapsed. Output and trade contracted at rates last seen in the 1930s. Policy makers responded by cutting interest rates to historically low levels, loosening fiscal policy and pumping new electronic money into the banking system through quantitative easing. This was not activist macro-economic policy, it was hyper-activist. Credit creation by the state compensated for credit rationing by the banks; spending by the state filled the breach left by the squeeze on private spending.

By the spring there were signs of the policy beginning to work. Output stabilised and financial markets rallied. While there are legitimate doubts – voiced by the IMF among others – as to whether the recovery is for real, the immediate threat of a 1930s-style slump has passed.

Only by the most convoluted reasoning can the crisis of the past two years, and the events that led up it, be described as a failure of big government. On the contrary, it was the deregulation of financial markets championed initially by governments of the right that allowed finance to strip away the prudential controls on its activities.

That’s why Cameron’s position is strategically vulnerable. Making the case for interventionist social democracy has never been easier: the mess was caused by a weak state allowing a free rein to a cadre of irresponsible financiers; only a newly emboldened state could clear the mess up.

It is a mistake to underestimate the opposition leader. There are those on the left who think that because he went to Eton he is, by definition, an upper-class twit. But Eton churns out lots of smart people (Keynes included). The current economic debate is not about the right’s responsibility for the crisis. Nor is it about the opposition’s own uncertain response to it. Instead, it is about which party has the most blood-curdling plans for spending cuts. That’s some achievement.

There’s enough sense in what Cameron says to make it politically potent; hence his cleverness. But it is still a flawed analysis. He is right, certainly, to argue that governments cannot run budget deficits of £175bn a year permanently. He is also right when he says that Britain was running a structural deficit of 2-3% of GDP going into the downturn.

But the deficit is the symptom of an economic problem, not its cause. The bulk of the deficit is accounted for by the contraction in the economy since the start of 2008, which has sharply eroded tax revenues and pushed up the cost of welfare spending. Only a small part of the deficit increase has been caused by discretionary tax and spending decisions by the chancellor, Alistair Darling. If the public finances had been in better shape in 2007, Labour would have been in a position to provide a bigger fiscal boost, but the upshot would have been broadly the same – a deficit this year in excess of 10% of GDP.

Scary proposals

If the lion’s share of the deficit was caused by the recession then, logically, the priority now should be to get the economy back on its feet as quickly as possible. Conjuring up the ghost of Stafford Cripps is more likely to hinder this process – by scaring the pants off consumers and small businesses – than it is to help.

Cutting back too soon could drive the economy into a depression, warned David Blanchflower, respected economist and a former member of the Bank of England’s monetary policy committee, in Saturday’s Guardian. “The Tory economic proposals have the potential to push the British economy into a death spiral of decline that would be almost impossible to reverse for a generation,” he wrote.

So what is Labour’s problem? Faced with the most propitious economic circumstances for a party of the centre-left for decades why is it so comprehensively failing to seize the moment? There are plenty of suggestions flying about. Some say it is all about Gordon Brown; the prime minister, it is said, simply does not cut it with the public and has been a liability since the election that never was in the autumn of 2007.

Some say it is a combination of a deep recession and being in power for too long; the electorate is bored with Labour and rising unemployment provides a convenient pretext for changing allegiance. Some put it down to the foreign wars, or the private finance initiative or the fact that the gap between rich and poor is wider than it was in 1997.

While all part of the story, none of these theories is entirely convincing. Labour has handled the crisis well; in the most trying of circumstances, it has got the big decisions right.

The government’s failure has been its inability to use the crisis to articulate a broader critique of market fundamentalism. And the reason for that is that from 1997 to 2007 Labour was complicit in the excesses of the market. It was too weak or too bedazzled to control the City, but not so reticent when it came to plans for DNA testing and ID cards. The supine approach to finance coupled with creeping social authoritarianism explains why Cameron’s attack on the big state resonates.

With anger at the banks still running high, it is still possible to seize the social democratic moment. What’s lacking is an intellectual argument that challenges the orthodoxy of the past three decades. That, though, requires an admission that much of what the government has believed these past 12 years was wrong. As things stand, that looks unlikely.

Larry Elliott, The Guardian, Monday 12 October 2009

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So successful have David Cameron’s Conservatives been in turning political debate on its head that all three main parties are now arguing not about how to beat the recession – but how far to squeeze public spending. Instead of competing over how to reverse the haemorrhage of jobs and offset the collapse of private investment, the issue has become which public services to cut.

That is a dangerous diversion. The crisis facing the country is not one of public borrowing, but of unemployment, business retrenchment and a failed economic model. Britain’s debt ratio isn’t particularly high by historical standards and is lower than other advanced economies. Nor is there any reason to believe it will become impossible to finance the increase in borrowing that has kept the banks afloat and the economy from tipping into a full-scale slump.

But although Gordon Brown is right that “growth is the best antidote to debt”, the cost of servicing that debt is set to increase as the economy recovers, and the growth of public spending is bound at least to slow.

A major contribution to cutting the deficit can of course be made by broadening the tax base: clamping down on tax allowances and loopholes to ensure the wealthy pay at least the same proportion of their income as low and middle income earners, for a start, would be both effective and popular.

There’s no reason why deficit reduction should have to mean cuts in public services, however, which could actually weaken the public finances still further, as the experience of the 1980s showed. The same goes for the likely attacks on the pay and conditions of most public sector workers, serially misrepresented as privileged and cosseted.

But it does offer a chance to reshape public services and the way they’re delivered. A switch of resources into public housing investment, for example, would have a powerful impact on both neglected communities and economic recovery.

Cuts in spending on ID cards, the Afghan war, Trident renewal and corporate welfare would be widely welcomed – as would the major savings to be had from slashing the vast infrastructure of bureaucracy, quangos and private consultancies built up to administer the marketisation and outsourcing of public services over the past couple of decades.

Instead, the expectation must be that the tempo of privatisation, which in public services has gone far further under New Labour than its Tory predecessors, will if anything accelerate. The claim will be that further private provision will cut costs.

The weight of evidence, on the contrary, is that from PFIs to PPPs, independent sector treatment centres to rail franchises, prisons to school testing, privatisation is actually more expensive and inefficient, less accountable, damaging to the public service ethos and a motor of political and corporate corruption.

Where privatisation does reduce costs, it has routinely been through cuts in pay, conditions and service quality. But by claiming the mantle of reform and choice, the privatisers have managed to pose as the service users’ champion. That’s why alternative models of public service reform, such as that pioneered by unions and managers at Newcastle city council, are potentially so important.

As part of a Unison-led campaign to resist the privatisation of the council’s IT department, the workforce played a central a role in reshaping it, achieving £28m worth of savings – without compulsory redundancies or loss of terms and conditions – along with sharp improvements in services, user satisfaction, training and investment. As the title of Hilary Wainwright’s account of the Newcastle experience has it, this is “public service reform … but not as we know it”.

If public services are to be defended from the slashers and privateers – and developed as the universal badge of social solidarity and citizenship they should be, rather than a second-class safety net for the poor – an alliance of workforces and users is going to be essential.

Seumas Milne | Comment is free | The Guardian

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A history of failed attempts to introduce universal health insurance has left us with a system in which the government pays directly or indirectly for more than half of the nation’s health care, but the actual delivery both of insurance and of care is undertaken by a crazy quilt of private insurers, for-profit hospitals, and other players who add cost without adding value. A Canadian-style single-payer system, in which the government directly provides insurance, would almost surely be both cheaper and more effective than what we now have. And we could do even better if we learned from “integrated” systems, like the Veterans Administration, that directly provide some health care as well as medical insurance.

Yet Obama is not prepared to grasp the nettle. His speech was even weaker than the spin preceding the joint address to Congress suggested. I thought the Obama people were lowering expectations with a view toward a big positive surprise and they managed to go even lower than the bar they set. He took caricatured positions on single payer in order to create a false “centrist” option. The President has basically has reduced the public option to a marginal welfare style program for 5% of the population, rather than seeing it as a way to break the monopoly of the private health insurance companies, thereby helping to reduce costs. He’s basically forcing everybody into a private health insurance run program.

The bad news is that Washington currently seems incapable of accepting what the evidence on health care says. The Obama Admininstration remains under the influence of the health insurance and pharmaceutical industry lobbyists, and is captive to a free-market ideology that is wholly inappropriate to health care issues. As a result, it seems determined to pursue policies that will increase the fragmentation of our system and swell the ranks of the uninsured.

We need affordable health care, not health insurance. Just look what is happening in MA. It’s not solving the problem at all, because there was no mechanism introduced to REDUCE HEALTH INSURANCE COSTS. Physicians for a National Health Program’s (PNHP) study of the Massachusetts model found that the state’s 2006 reforms, instead of reducing costs, have been more expensive than expected. The budget overruns have forced the state to siphon about $150 million from safety-net providers such as public hospitals and community clinics:

“We are facing a health-care crisis in this country because private insurers are driving up costs with unnecessary overhead, bloated executive salaries and an unquenchable quest for profits — all at the expense of American consumers,” said Dr. Sidney Wolfe, director of Public Citizen’s Health Research Group. “Massachusetts’ failed attempt at reform is little more than a repeat of experiments that haven’t worked in other states. To repeat that model on a national scale would be nothing short of Einstein’s definition of insanity.”

Yet Massachusetts seems to be the implicit model. Despite the obvious popularity of Medicare, there was no serious discussion of expanding it as a possible public health care option (as we had suggested earlier) and there was no attempt to use the public option as a means of expanding choice and competition if a worker was unhappy with the health care program offered by his employer.

The Clinton health care version at least tried to deal with the issue of portability, so that health care did not get tied in directly to employment (a highly germane consideration in a time of double digit unemployment and mounting economic insecurity). There is no hint of that in the Obama plan. If anything, it represented a retrograde step from what was on offer in last year’s campaign via the Clinton or Edwards health care proposals. Most advanced countries have dealt with the defects of private health insurance in a straightforward way, by making health insurance a government service. Through Medicare, the United States has in effect done the same thing for its seniors. We get the status quo. The paucity of imagination of the proposals themselves were completely at variance with the President’s soaring rhetoric, something which is unfortunately becoming a recurrent theme of the entire Obama Presidency.


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It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes — or so they believed — were both theoretical and practical, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled “The State of Macro” (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making.

Last year, everything came apart.

Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts.

And in the wake of the crisis, the fault lines in the economics profession have yawned wider than ever. Lucas says the Obama administration’s stimulus plans are “schlock economics,” and his Chicago colleague John Cochrane says they’re based on discredited “fairy tales.” In response, Brad DeLong of the University of California, Berkeley, writes of the “intellectual collapse” of the Chicago School, and I myself have written that comments from Chicago economists are the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten.

What happened to the economics profession? And where does it go from here?

As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.

Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.

It’s much harder to say where the economics profession goes from here. But what’s almost certain is that economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, this will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems.

Full article: September 6, 2009 How Did Economists Get It So Wrong? By PAUL KRUGMAN

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The debate over the “public option” in health care has been dismaying in many ways. Perhaps the most depressing aspect for progressives, however, has been the extent to which opponents of greater choice in health care have gained traction — in Congress, if not with the broader public — simply by repeating, over and over again, that the public option would be, horrors, a government program.

Washington, it seems, is still ruled by Reaganism — by an ideology that says government intervention is always bad, and leaving the private sector to its own devices is always good.

Call me naïve, but I actually hoped that the failure of Reaganism in practice would kill it. It turns out, however, to be a zombie doctrine: even though it should be dead, it keeps on coming.

Let’s talk for a moment about why the age of Reagan should be over.

First of all, even before the current crisis Reaganomics had failed to deliver what it promised. Remember how lower taxes on high incomes and deregulation that unleashed the “magic of the marketplace” were supposed to lead to dramatically better outcomes for everyone? Well, it didn’t happen.

To be sure, the wealthy benefited enormously: the real incomes of the top .01 percent of Americans rose sevenfold between 1980 and 2007. But the real income of the median family rose only 22 percent, less than a third its growth over the previous 27 years.

Moreover, most of whatever gains ordinary Americans achieved came during the Clinton years. President George W. Bush, who had the distinction of being the first Reaganite president to also have a fully Republican Congress, also had the distinction of presiding over the first administration since Herbert Hoover in which the typical family failed to see any significant income gains.

And then there’s the small matter of the worst recession since the 1930s.

There’s a lot to be said about the financial disaster of the last two years, but the short version is simple: politicians in the thrall of Reaganite ideology dismantled the New Deal regulations that had prevented banking crises for half a century, believing that financial markets could take care of themselves. The effect was to make the financial system vulnerable to a 1930s-style crisis — and the crisis came.

“We have always known that heedless self-interest was bad morals,” said Franklin Delano Roosevelt in 1937. “We know now that it is bad economics.” And last year we learned that lesson all over again.

Or did we? The astonishing thing about the current political scene is the extent to which nothing has changed.

The debate over the public option has, as I said, been depressing in its inanity. Opponents of the option — not just Republicans, but Democrats like Senator Kent Conrad and Senator Ben Nelson — have offered no coherent arguments against it. Mr. Nelson has warned ominously that if the option were available, Americans would choose it over private insurance — which he treats as a self-evidently bad thing, rather than as what should happen if the government plan was, in fact, better than what private insurers offer.

But it’s much the same on other fronts. Efforts to strengthen bank regulation appear to be losing steam, as opponents of reform declare that more regulation would lead to less financial innovation — this just months after the wonders of innovation brought our financial system to the edge of collapse, a collapse that was averted only with huge infusions of taxpayer funds.

So why won’t these zombie ideas die?

Part of the answer is that there’s a lot of money behind them. “It is difficult to get a man to understand something,” said Upton Sinclair, “when his salary” — or, I would add, his campaign contributions — “depend upon his not understanding it.” In particular, vast amounts of insurance industry money have been flowing to obstructionist Democrats like Mr. Nelson and Senator Max Baucus, whose Gang of Six negotiations have been a crucial roadblock to legislation.

But some of the blame also must rest with President Obama, who famously praised Reagan during the Democratic primary, and hasn’t used the bully pulpit to confront government-is-bad fundamentalism. That’s ironic, in a way, since a large part of what made Reagan so effective, for better or for worse, was the fact that he sought to change America’s thinking as well as its tax code.

How will this all work out? I don’t know. But it’s hard to avoid the sense that a crucial opportunity is being missed, that we’re at what should be a turning point but are failing to make the turn.

Op-Ed Columnist – All the President’s Zombies – NYTimes.com, Krugman.

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Excelente análise the Paul De Grauwe. Aposto, para o melhor, que os Ladrões de Bicicletas não deixarão de comentar.

Economics is in crisis: it is time for a profound revamp

There can be little doubt. The science of macroeconomics is in deep trouble. The best and the brightest in the field fight over the most basic problems. Take government budget deficits, which now exceed 10 per cent of gross domestic product in countries such as the US and the UK. One camp of macroeconomists claims that, if not quickly reversed, such deficits will lead to rising interest rates and a crowding out of private investment. Instead of stimulating the economy, the deficits will lead to a new recession coupled with a surge in inflation. Wrong, says the other camp. There is no danger of inflation. These large deficits are necessary to avoid deflation. A clampdown on deficits would intensify the deflationary forces in the economy and would lead to a new and more intense recession.

Or take monetary policy. One camp warns that the build-up of massive amounts of liquidity is the surest road to hyperinflation and advises central banks to prepare an “exit strategy”. Nonsense, the other camp retorts. The build-up of liquidity just reflects the fact that banks are hoarding funds to improve their balance sheets. They sit on this pile of cash but do not use it to increase credit. Once the economy picks up, central banks can withdraw the liquidity as fast as they injected it. The risk of inflation is zero.

Both camps line up an impressive list of Nobel prize-winners to buttress their arguments. Economists have often disagreed in the past, but this time the tone is different. The protagonists do not hesitate to accuse the other camp of ignorance or bad faith. I have never seen anything like this.

So what? Does it matter that economists disagree so much? It does. Take the issue of government deficits. If you want to forecast the long-term interest rate, it matters a great deal which of the two camps you believe. If you believe the first one, you will fear future inflation and you will sell long-term government bonds. As a result, bond prices will drop and rates will rise. You will have made a reality of the fears of the first camp. But if you believe the story told by the second camp, you will happily buy long-term government bonds, allowing the government to spend without a surge in rates, thereby contributing to a recovery that the second camp predicts will follow from high budget deficits.

Most people are not sure which camp is right. They hesitate. One day, when green shoots are popping up here and there, they believe the story warning about inflation; the next day, when the shoots turn brownish, they believe the other story. Disagreements among economists take away the intellectual anchors around which market participants interpret events and forecast the future. Ultimately, all our forecasts use a particular economic model to interpret data and to forecast their future course. The existence of wildly different models takes away this intellectual anchor and this translates into more market volatility.

This conflict matters not only for market participants, but also for policymakers. The two camps of economists have wildly different estimates of the effect of a 1 per cent permanent increase in government spending on real US GDP over the next four years. According to the first camp, the Ricardians, the multiplier is closer to zero than to one, ie 1 per cent extra spending generates much less than 1 per cent of extra GDP, producing little extra tax revenue. Thus budget deficits surge and become unsustainable.

By contrast, the second camp, the Keynesians, predict that the same 1 per cent of extra government spending multiplies into significantly more than 1 per cent of extra GDP each year until the end of 2012. This is the stuff of dreams for governments, because such multiplier effects are likely to generate additional tax income so that budget deficits decline.

With so much disagreement it is no surprise that policymakers are unsure and vacillate. Some countries, such as the US and France, go all out for the Keynesian story; others, such as Germany, put more faith in the Ricardians. Personally I think the Keynesians are right, but my opinion is irrelevant. The point is that the cacophony of analysis helps to explain why policymakers react in different ways to the same crisis and why it is so difficult for them to come up with co-ordinated action.

How to resolve this crisis in maco-economics? The field must be revamped fundamentally. Some of its shortcomings are obvious. Before the financial crisis, most macroeconomists were blinded by the idea that efficient markets would take care of themselves. They did not bother to put financial markets and the banking sector into their models. This is a major flaw.

There is a deeper problem, though, that will be more difficult to resolve. This is the underlying paradigm of macroeconomic models. Mainstream models take the view that economic agents are superbly informed and understand the deep complexities of the world. In the jargon, they have “rational expectations”. Not only that. Since they all understand the same “truth”, they all act in the same way. Thus modelling the behaviour of just one agent (the “representative” consumer and the “representative” producer) is all one has to do to fully describe the intricacies of the world. Rarely has such a ludicrous idea been taken so seriously by so many academics. (Other fields of economics have not been deluded by this implausible idea and therefore do not face the same criticism.)

We need a new science of macroeconomics. A science that starts from the assumption that individuals have severe cognitive limitations; that they do not understand much about the complexities of the world in which they live. This lack of understanding creates biased beliefs and collective movements of euphoria when agents underestimate risk, followed by collective depression in which perceptions of risk are dramatically increased. These collective movements turn uncorrelated risks into highly correlated ones. What Keynes called “animal spirits” are fundamental forces driving macroeconomic fluctuations.

The basic error of modern macro-economics is the belief that the economy is simply the sum of microeconomic decisions of rational agents. But the economy is more than that. The interactions of these decisions create collective movements that are not visible at the micro level.

It will remain difficult to model these collective movements. There is much resistance. Too many macro-economists are attached to their models because they want to live in the comfort of what they understand – the behaviour of rational and superbly informed individuals.

To paraphrase Isaac Newton, macroeconomists can calculate the motions of a lonely rational agent but not the madness of the crowds. Yet if macroeconomics wants to become relevant again, its practitioners will have to start calculating this madness. It is going to be difficult, but that is no excuse not to try.

Paul De Grauwe / FT.com / Comment / Opinion – Economics is in crisis: it is time for a profound revamp – Published: July 21 2009

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