The 2021 Economy: We Are All Super Keynesian Now

Por Alejandro Chafuen: Publicado el 9/1/21 en:

The US economy will continue to grow during the first part of the year, driven mostly by sectors that have benefited from the reallocation of resources due to the pandemic. If the incoming Biden administration does not impose greater restrictions on the U.S. economy, there will also be some recovery in areas that saw the greatest losses during 2020. The Federal Reserve’s easy monetary policy will continue, and for the time being this will fuel increased economic activity.

Top 10 economies: GDP 2021 forecast, Covid-19 and economic and rule of law indicators
GDP 2021 forecast for the top ten economies and current Covid-19 and economic and rule of law … [+] ALEJANDRO CHAFUEN

I usually base my yearly forecasts on indicators relevant to the business environment. Such factors (which are also used to calculate the various indices of economic freedom) include tax and regulatory policies, trade, rule of law, and monetary policy. But analyzing what will happen with the economy in 2021 will depend on factors that go beyond economic policy. The two key factors are the continued impact of the Covid-19 pandemic and the change in the U.S. administration and the composition of Congress.

The Democratic sweep of the Georgia Senate races opens the door for the adoption of several of the Biden administration’s most anti-free-economy proposals. Biden will be pressured to fulfill his promise to reverse Trump tax cuts, especially the corporate tax rate. The narrow victory will give a huge boost to the current “Washington consensus” that government spending accompanied by an easy monetary policy and increased borrowing is an elixir that can’t fail. Increased regulations will also be part of the Biden economic policy mix. Increase in taxation, however, might be delayed since, despite higher growth rates, the economy will be still very weak compared to pre-pandemic days.

Nothing in the Biden agenda is different from what many European countries have been implementing in recent years. The higher level of government spending relative to GDP, more stringent environmental regulations, higher taxes, and “quantitative easing” have not led to higher growth rates in Europe. On average, the large economies of Europe saw a bigger decline in their GDP than the US did. They will also likely recover at a slower pace than the US. The new U.K. lockdowns and the spike in Covid-19 cases in Germany should revise European growth forecasts downward. Nevertheless, in the U.S. the 2021 economy, given the 2020 decline, will likely grow at over 4%, partly in new directions and partly catching up. The potential for a rebound is there, especially if the vaccines prove effective and state and local governments begin to lift restrictions.  

Atmosphere at Wall Street in Lower Manhattan - 1/2/21
Photo by: STRF/STAR MAX/IPx 2021 1/2/21 Atmosphere at Wall Street in New York City. The Stock Market … [+] STRF/STAR MAX/IPX

The U.S. stock market shows a good deal of optimism, as if the easy-money party can go on forever. But stocks also reflect changes in the real economy. For instance, the stock price of Tractor Supply Company TSCO -3.6% (almost doubling since March 2020) reflects the general move away from large cities and the increased construction in rural areas. New investments by people working from home and by the companies that serve them, from entertainment to communication, are also reflected in rising stock prices. Such companies include Microsoft MSFT -2.4%, Zoom, and DocuSign DOCU -1.5%. Part of this dynamic and reallocation of resources will continue at least for the first half of 2021. Some of the new consumer and investment patterns caused by reactions to the pandemic will be here to stay, but it too early to evaluate whether it will lead to higher or lower productivity in the future.

Regarding monetary policy, rare is the analyst that does not expect a more expansionary trend. More voices are cautioning about the return of inflation, but I think we will have to wait until 2022 to see inflation pressures that are strong enough (over 3% per year in consumer price index) to lead to a change of the current mindset that monetary authorities can save us from any trouble.

Despite the increase in the trade deficit, we will see a gradual return to the pre-Trump consensus. Not that the prospects for freer trade were rosy before Trump – any proposal that leads to greater liberalization with Europe is likely to face opposition there. It seems that it will be easier to get the United States back into the Trans-Pacific Partnership Agreement than to achieve a big breakthrough with Europe.

Among Western countries, none comes close to the importance the United States in evaluating what will happen with the world economy. Globally, however, China is almost as relevant. Unfortunately, more capitalism has not lead to a freer political system in China. We saw another corroboration of this on January 6, when fifty three pro-democracy activists were detained in Hong Kong. In my piece last year about the 2020 economy, I wrote that leading publications around the world were publishing articles with titles such as “2019 was a horrible year for Xi Jinping’s China” (Le Monde). The scene has changed now and the Chinese economy is forecast to grow over 8% next year, remaining a magnet for those who want to do business and pursue profits at all costs.

In March of 2020, when it was clear that the pandemic was spreading around the world, I stated that, in the long term, the biggest danger for the free society and economy would be to see the Chinese model of a mix of communism and markets emerge victorious. If we trust the numbers, China has won. Even if they undercounted their Covid-19 deaths by a factor of 10, they would have, together with Japan, the lowest Covid-19 deaths per million. The Chinese economy is the only one in the top ten which grew last year. The power of the Chinese Communist Party can’t be measured by government spending. It can rule its mega-State without the need of becoming a Deep State.  

What are the implications of a victory of the China model for the US and the world economy? It is logical to conclude that the world of business, at least big business, will continue to work with the conviction that working with governments both here and abroad is not only consistent, but necessary for profit maximization. This alliance of large corporations and big government is what many of us call the “crony capitalist” model. Some Western countries might be able to resist the pressure, but most of the countries that have China as their main trading partner have a very weak rule of law and prevalent corruption. In those countries Chinese corporations working side by side with the Chinese government will likely dictate the terms of the most relevant business transactions.  

Keynes In USA
John Maynard Keynes, (1883 – 1946), (centre), to overcome stagnation, Keynes advocated government … [+] GETTY IMAGES

During economic crises it is normal to hear those responsible for economic policy say, “We are all Keynesians now.” Looking at the record highs of the stock markets during a time of dramatic political division, it almost seems that “we are all super-Keynesians now.” Although like other analysts I believe we are in an “almost-everything” bubble, when it comes to the real economy I will have to leave my pessimistic thoughts for 2022.

Alejandro A. Chafuén es Dr. En Economía por el International College de California. Licenciado en Economía, (UCA), es miembro del comité de consejeros para The Center for Vision & Values, fideicomisario del Grove City College, y presidente de la Atlas Economic Research Foundation. Se ha desempeñado como fideicomisario del Fraser Institute desde 1991. Fue profesor de ESEADE. Síguelo en @Chafuen 

The Super-alertness of Central Bankers

Por Nicolás Cachanosky. Publicado el 27/7/18 en:




The most common and widely accepted argument in favor of central banks is that they are necessary to put a check on the inherent instability of financial markets. Most economists agree that markets self-regulate pretty well, except when it comes to money and banking. Note that the argument does not stop at the need for financial regulation, but goes all the way to supporting a government monopoly on the issuance of money.

The argument that the market in money and banking is inherently unstable is contestable both theoretically and empirically. But, leaving this issue aside, the idea that a central bank is needed does not mean it can achieve its desired objectives. A number of reasons can be given for why it is unlikely that central bankers will perform their job efficiently. Here I want to focus on what I call the super-alertness of central bankers.

Alertness is the term Israel Kirzner uses in his work on entrepreneurship. The role of the entrepreneur in the market process consists in discovering market disequilibria to which the other economic agents are blind. Market information, such as prices, captures real conditions in the world and economic agents’ expectations of future conditions. Successful entrepreneurs have the alertness to discover what others are not observing. A significant implication of Kirzner’s analysis is that entrepreneurs are the driving force of the market, meaning they are the ones that reallocate resources while moving the market closer to equilibrium. Note that entrepreneurs need market information as an input for their alertness. Entrepreneurial alertness occurs within the market.

Central bankers are in a different situation. Central bankers use market information to decide monetary policy. But such market information is the result of central bankers’ policies in the first place. Central bankers do not take market information as given, because they have a significant effect on the variables that generate it. There is a further distinction to be made. Central banks are not just monopoly producers inside the market; they are above the market.

Central bankers need not merely be alert to market disequilibria, like entrepreneurs. Rather, they must be super alert. They must foretell, without the proper information, how the whole market will react to new conditions. That requires a special type of alertness—an alertness that is as special as it is unrealistic.


Nicolás Cachanosky es Doctor en Economía, (Suffolk University), Lic. en Economía, (UCA), Master en Economía y Ciencias Políticas, (ESEADE). Fué profesor de Finanzas Públicas en UCA y es Assistant Professor of Economics en Metropolitan State University of Denver.

Economist Are Not Like Doctors

Por Nicolás Cachanosky. Publicado el 16/4/18 en:

In a recent paper, Ricardo Reis offers an interesting insight in the debate on dynamic stochastic general equilibrium that has taken place in macroeconomics since the 2008 financial crisis. While some economists argue that DSGE modeling is fundamentally flawed, others maintain that because the crisis was unexpected, it is inappropriate to blame such modeling.

Reis admits that DSGE modeling is not perfect and that there is certainly room for improvement. However, he argues, macroeconomics is much more than DSGE modeling. Even if critiques of DSGE modeling are correct, those critiques do not extend to macroeconomics as a field. Reis pushes further the defense of macroeconomics by arguing that it is not the job of macroeconomists to predict crises.

His argument is based on an analogy. Imagine, he invites the reader, going to your doctor and asking the doctor to forecast whether you’ll be alive two years from now. Your physician says you are more than 50 percent likely to be alive. However, within that time frame you suffer a fatal heart attack. Reis asks, “Should there be outrage at the state of medicine for missing the forecast, with such deadly consequences?” Reis concludes that the economist’s job, just like that of the physician, is not to predict someone’s heart attack but to understand why it happened and learn from this deadly event. A more sophisticated version of this argument recognizes that predictions are conditional. Given the life choices of the patient, the physician can update his or her forecast. So does the economist.

I’m afraid Reis’s analogy is mistaken for two reasons. First, during the financial crisis it wasn’t just one bank that had a heart attack: most banks were under financial distress. It is not as if one particular physician missed one particular heart attack. It is more like if the World Health Organization missed a massive spate of heart attacks around the world.

Second, the economist is not like the physician, at least in the context of Reis’s discussion. The difference is that banks, as economic agents, need to abide by central bankers’ regulations and are subject to their monetary policy. Economists in government regulate banks and dictate monetary policy. Unlike the physician in Reis’s example, the economist is not an impartial observer. The economist is, rather, a key player. If my physician tells me that, following World Health Organization regulations and policies, he or she is forcing me into a lifestyle with an unhealthful diet and no physical activity, I not only have the right to ask for a forecast, I also have the right to be concerned and ask for an explanation if I observe a spate of heart attacks among people subject to the WHO regulations and policies. Physicians, especially the ones working at the WHO, cannot avoid their responsibility by claiming their job is to understand what happened ex post.

It is true, as Reis points out, that there can be unexpected shocks. But no one is disappointed at economists being unable to predict the unpredictable. The issue is that crises can also occur because of mistaken policies designed by economists and enforced through central banks and regulators. Reis does not seem to entertain the idea that central bankers can commit very costly mistakes. And DSGE modeling, for better and for worse, is an important component of policy design.

If macroeconomists want to be more like physicians and be able to claim no responsibility for crises, then they should move away from advocating monetary institutions built on central banks and toward those based on competitive markets. The extensive academic literature on free banking shows that a free market in money and banking is not to be feared. Experts’ mistakes can in fact be more damaging.



Nicolás Cachanosky es Doctor en Economía, (Suffolk University), Lic. en Economía, (UCA), Master en Economía y Ciencias Políticas, (ESEADE). Fué profesor de Finanzas Públicas en UCA y es Assistant Professor of Economics en Metropolitan State University of Denver.

Financial bubbles and macro prudential policy

Por Nicolás Cachanosky. Publicado el 30/9/15 en:


In the field of monetary policy, there is one question that must necessarily be addressed: what should a central bank do in light of a financial bubble? Should it try to burst the bubble as soon as it arises or engage in damage control after a financial crisis occurs?

Personally, I don’t think that there is any one answer to this question- it would depend on too many variables. But there’s one solution that central bankers might consider: not creating bubbles in the first place. After all, bubbles don’t fall from the sky: for financial bubbles to occur, monetary policy must deviate from monetary equilibrium

For whatever reason, however,  mainstream analyses aren’t discussing the sources of financial bubbles. It is taken for granted that financial bubbles occur unpredictably as a result of irrational behavior and so central banks are simply tasked with either bursting bubbles or taking on the costs of a financial crisis.

A financial bubble occurs when the price of assets are with respect to what the fundamentals would justify. For instance, if the price of a stock of a company is justifiable by how well the company is doing and expected to do, then there is no bubble. But if the price is higher than the company’s value based on its actual performance and outlook, then there is a bubble. Because the price of stocks is expected to grow in the mid and long terms in a healthy and growing economy, rising prices of financial assets do not suggest that there is monetary disequilibrium.

The problem is that expectations of higher financial stock prices are not enough to explain a bubble. If I suspect that stock prices are constantly rising, then I can buy a stock and sell it afterwards. To do this, however, I need the resources to buy the stocks in the first place. The extra money used to buy financial assets need to come from either 1) consumption or 2) savings. The price of goods should fall or interest rates should rise; both effects counteract the incentive to buy financial stocks.

It would be a different story if the required monetary resources were to come from newly printed money. Miscalculated expectations would still need to be financed through a monetary policy deviation on behalf of the central bank. Instead of focusing on price levels, unemployment and output, central banks should instead focus on monetary equilibrium, allowing other variables to work their way to their own equilibriums. After all, a central bank is a key participant in the money market. As an institution that affects the supply of money, it’s ideal goal should be to keep an equilibrium between the money supply and money demand. This is the central idea behind the so-called “Hayek’s rule” or NGDP targeting.

Having the right target really is the best macroprudential policy.


Nicolás Cachanosky es Doctor en Economía, (Suffolk University), Lic. en Economía, (UCA), Master en Economía y Ciencias Políticas, (ESEADE). Fué profesor de Finanzas Públicas en UCA y es Assistant Professor of Economics en Metropolitan State University of Denver.

There Are Two Ways to Fix Monetary Policy: the Fast Way, and the Right Way:

Por Nicolás Cachanosky: Publicado el 4/4/12 en:

…and the government way.

The expectations of modest growth in January by the Fed deflated to moderate growth in mid-March. The monetary policy that the Fed and the Treasury have followed have failed to have the desired effects. But that doesn’t stop policy makers from trying the same medicine – even if the name for it changes. As reported by Reuters:

“As widely expected, the Fed reiterated its expectation that overnight interest rates would remain near zero until at least through late 2014 and that it would continue its program to reweight its portfolio toward longer-term securities. That program, known as “Operation Twist,” expires at the end of June.”

Policy makers still fail to attack the underlying problem: Uncertainty and fiscal deficits (with high levels of government debts). Since the interest rate set by the central banks affects the cost of the Treasury’s debt, central bankers are cornered between keeping interest rates low, or increasing interest rates to lower uncertainty on future inflation but at the cost of increasing the debt outlays of the Treasury. It shouldn’t be the role of the central bank to assist the Treasury, and it shouldn’t be the strategy of the Treasury to increase government debt beyond reasonable limits. In addition, it is the role of the representatives in the Congress and Parliaments to put a limit to the spending and issuance of debt to the executive power.

Interest rates affect with different magnitude different industries and projects that are more or less forward looking. Therefore, a monetary policy that drives the interest rates below the market equilibrium produce real distortions on the economy. The QE policy only achieves to postpone the correction of underlying imbalances. But the economy cannot be fixed with interest rates when the fiscal and future regime structure is so uncertain. Will countries default? Will the Euro survive? Will the USD lose market share in the international markets as the reserve currency? etc…

“While the economic recovery is nearly three years old, officials lament that the United States is still far from full employment. Although the jobless rate has fallen significantly over the last six months, it remains stubbornly high.”

Policy makers need to look somewhere else to solve the economic problems affecting Europe and the United States.

Nicolás Cachanosky es Lic. en Economía, (UCA), Master en Economía y Ciencias Políticas, (ESEADE), y Doctorando en Economía, (Suffolk University). Es profesor universitario.