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Wrong Steven Fazzari?

Mr. Steven M. Fazzari

Professor of Economics

Washington University

Direct Phone: (314) ***-****       

Email: f***@***.edu

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Washington University

One Brookings Drive

St. Louis, Missouri 63130

United States

Company Description

Washington University in St. Louis is a medium-sized, independent research university dedicated to challenging its faculty and students alike to seek new knowledge and greater understanding of an ever-changing, multicultural world. The university is count ... more

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Background Information

Affiliations

Academic Advisor
Academic Council

Advisory Board Member
Institute for New Economic Thinking

Academic Advisor
The Jerome Levy Forecasting Center LLC

Co-Founder
Microsoft Corporation

Member of the Editorial Board
Eastern Economics Journal

Education

B.S. with distinction

mathematical sciences

Stanford University

Ph.D.

economics

Stanford University

Web References (198 Total References)


The explanation Times writer Nelson D. ...

www.builderonline.com [cached]

The explanation Times writer Nelson D. Schwartz gives for a velvet rope economy that caters to the ultra privileged to the exclusion of the masses is well-put by Steven Fazzari, a professor of economics at Washington University in St. Louis, and could easily apply to what's been happening for the past two-plus years on the new home development front:


In an Age of Privilege, Not Everyone Is in the Same Boat - The New York Times

www.nytimes.com [cached]

"You go where the money is," said Steven Fazzari, a professor of economics at Washington University in St. Louis.

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Spending by the top 5 percent of earners rose nearly 35 percent from 2003 to 2012 after adjusting for inflation, according to a study by Mr. Fazzari and Barry Z. Cynamon of the Federal Reserve Bank of St. Louis.
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Source: Barry Z. Cynamon (Federal Reserve Bank of St. Louis), Steven M. Fazzari (Washington Univ. in St. Louis)


Business Cycles, Recessions, and the Great Depression Archives | EconTalk | Library of Economics and Liberty

www.econtalk.org [cached]

EconTalk Episode with Steve Fazzari

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Steve Fazzari of Washington University in St. Louis talks with EconTalk host Russ Roberts about the economics of Keynesian stimulus.
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CATEGORIES: Business Cycles, Recessions, and the Great Depression , Financial Crisis of 2008 , Steve Fazzari
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EconTalk Episode with Steve Fazzari
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Steve Fazzari, of Washington University in St. Louis, talks with EconTalk host Russ Roberts about Keynesian economics.
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Fazzari talks about the paradox of thrift, makes the case for a government stimulus plan, and weighs the empirical evidence for a Keynesian worldview.
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CATEGORIES: Business Cycles, Recessions, and the Great Depression , Steve Fazzari


Fazzari on Keynesian Economics | EconTalk | Library of Economics and Liberty

www.econtalk.org [cached]

EconTalk Episode with Steve Fazzari

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Steve Fazzari, of Washington University in St. Louis, talks with EconTalk host Russ Roberts about Keynesian economics.
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Fazzari talks about the paradox of thrift, makes the case for a government stimulus plan, and weighs the empirical evidence for a Keynesian worldview.
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Steve Fazzari's Home page "Household Debt in the Consumer Age: Source of Growth Risk of Collapse", by Steve Fazzari (co-authored with Barry Cynamon).
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"A Penny Saved May Not be a Penny Earned: Thinking Hard About Saving and the Creation of Wealth", by Steve Fazzari
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CATEGORIES: Business Cycles, Recessions, and the Great Depression (57) , Steve Fazzari (2) TWITTER: Follow Russ Roberts @EconTalker
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If, according to Dr. Fazzari & Keynes, overall savings & income decrease, because less money is circulating throughout the economy, so be it. It was an unsustainable boom to begin with (fueled in large part by federal government policy, but that's a different conversation).
How to direct resources to their most productive uses is critical. The historical evidence is clear that free markets are far superior to central governmental planning & spending in achieving this.
The problem I have with Dr. Fazzari & Keynes is there's no supporting evidence to their arguments.
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I thought the podcast was great, and Prof. Fazzari's illustration of the paradox of thrift was very clarifying. At the same time, I also found myself shouting "No! periodically while listening to it.
When explaining the paradox of thrift, for example, Prof. Fazzari says explicitly that you have to hold total income constant. Yet his conclusion is that, in the case he provides, total income will fall.
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The offsetting behavior by the business owner is the puzzle presented by Fazzari in the podcast.
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The reason could be as described by Fazzari, based on one of Keynes's original concepts that any attempt to save once equilibrium is breached is instantly offset by the actions of other entities.
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The more I think about Prof. Fazzari's example (of the paradox of thrift), the less persuasive it becomes.
Prof. Fazzari is right to note that when a family decides to divert spending on eating at a restaurant to savings, then ceteris paribus the restaurant owner will face a corresponding reduction in income. So the restaurant owner will face the choice of reducing consumption or reducing savings. Prof. Fazzari, however, just assumes that he will respond by reducing savings, and indeed this assumption is pivotal to his conclusion that overall savings won't increase. So, basically, Prof. Fazzari's example assumes exactly what it sets out to prove, which is a nice rhetorical trick, but logically speaking not so hot.
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I think Prof. Fazzari's example of the restaurant seems pretty reasonable. Isn't he basically explaining the identity that includes the velocity of money and GDP, while pointing out that a payment for food (or anything) merely shifts the money from one bank account to another, which will be available for investment regardless of whose account it is in?
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I personally found Prof. Fazzari's specific explication of the Paradox of Thrift solid and enlightening. As a software engineer used to systems thinking, it made a lot of sense.
Lee, Josiah - The reason I expect Prof. Fazzari is suggesting that the restaurant owner is going to reduce saving rather than reduce consumption is because it's one of the things he's holding constant.
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One of the things Prof. Fazzari explained is that saving reduces income in the system as a whole.
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One question I would have for Prof. Fazzari (and folks like Barry Kelly) is where did the restaurant come from?
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If total income is to remain constant (Prof. Fazzari's assumption) and the restaurant owner has lost income, then there must be one or more people in the economy who's income has increased by the exact amount that the restaurant owner's has decreased, and they should be able to "make up the gap" in spending.
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Steve said, "...the source of why the US economy has done pretty well over the last 20 to 25 years - I might think of it as an autonomous drive to more demand."
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I was waiting for Fazzari to say something like - "in normal times, your extra savings would be lent out to someone else, but during a recession..."
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What surprises me the most is that Fazzari seems to be arguing that there is no benefit to savings.
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What drove me crazy about Prof. Fazzari's analysis was the way he conflated savings and income, as if they were the same thing.
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Fazzari was incorrect in stating that the restaurant owner would decrease his savings to keep production at normal level. In reality, the restaurant owner would not decrease his own savings but rather decrease his production of food (due to less demand now). His income would fall.
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I don't think Fazzari adequately responded to the question of why, if personal savings creates no net increase in loanable funds from the bank, it should result in any net destruction of such funds either. Furthermore, he assumes the money I spend at the restaurant would be saved by the restaurant owner. But isn't the problem that everyone (or most people) in the economy are living beyond their means, borrowing and spending rather than saving?
Also, Fazzari responds to the perennial reductio ad absurdum for Keynesian theory, that the government should hire people to dig holes and then fill them back up again, by saying basically "of course we don't recommend anything that silly".
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As Fazzari demonstrates, some of these guys are extremely bright, but seem to have a glitch in their thinking which can't process this type of info. I am sure they probably have other thinking skills which we don't have that are very useful, but trying to reason with them on macroeconomics is like trying to turn an extravert into an introvert or a right handed person into a left hander - they don't get it, and in fact they won't ever get it.
Posted January 13, 2009 6:29 PM Mark K writes:
I thought Prof. Fazzari did an exceptional job of defending his arguments.
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When Fazzari assumes incremental profit margins of 100% he also assumes in incremental ROI of infinity!
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I do not think Fazzari really answered this?
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In summary, by by-passing the banks as intermediaries, we can see the difference between the classical and Keynesian model (as put forth by Fazzari).
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There has to be another piece to the story to explain that breakdown, and that is the piece that Fazzari didn't get into.
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But it turns out that bank debt is a very secure asset and therefor people are willing to take bank debt as payment as if though it really was dullish green slips of paper with dead presidents on; but they're not willing to take an IOU from your friend Steve(who owes you $5 for a beer) in lieu of fed money.
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I think that Mr. Fazzari has some valid points, though he may not have made them very clearly. I suppose that in essence, he argues for a "smoothing" of the natural cycles of business, and that parachute drops, or hole digging/filling projects will prevent markets from overshooting the bottom on the way down.
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One thing that I would like answered by Steve is.
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I found it particularly warming to hear at the end Mr Fazzari and Russ being quite honest about our limited understanding of what really seems to be going on.
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No matter how many times Fazzari asserted the Paradox of Thrift Roberts didn't seem to grasp that Fazzari really was asserting that when the consumer in the restaurant example substitutes unpaid labor for paid and as a result leaves more money in his checking account (the main effect -- he is also substituting his food purchases for the restaurant's, his trips to the grocery store for the restaurant's deliveries, fueling his stove for the restaurant's gas purchases, etc.) that there was no net increase in savings.
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Which is a shame, because Fazzari is speaking nonsense.
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I noticed someone further up this thread who caught the basic point that Fazzari was assuming his conclusion by holding the restaurant owner's expenditures constant.
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I didn't find Prof. Fazzari's argument convincing at all.
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The difference between Fazzari and Xeno is that Xeno knew that the racer would pass the tortoise, and that there was therefor something wrong with the argument he was making. Fazzari really seems to think that saving doesn't increase savings.
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Professor Fazzari was clear and appealingly modest, but his argument is frustratingly circular: it implies that aggregate saving and consumption has to be static.
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I found two holes (from a micro perspective) in Prof. Fazzari's restaurant example that you failed to bring up. Perhaps I'm missing s


Fazzari on Stimulus and Keynes | EconTalk | Library of Economics and Liberty

www.econtalk.org [cached]

EconTalk Episode with Steve Fazzari

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Steve Fazzari of Washington University in St. Louis talks with EconTalk host Russ Roberts about the economics of Keynesian stimulus.
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Steve Fazzari's Home page
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Intro. [Recording date: January 20, 2011.] Steve is a self-avowed Keynesian, not one who finds it politically expedient. Philosophical, methodological, economic differences between us.
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Steve, you've got to let the host do some of the work here!
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Steve is a superb Principles teacher.
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CATEGORIES: Business Cycles, Recessions, and the Great Depression (57) , Financial Crisis of 2008 (64) , Steve Fazzari (2)
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I went into the discussion with an open mind, but Fazzari's logic was surprisingly shallow--where does the money come from to do the Keynesian stimulus? If there really is a free lunch in this form, then why doesn't the government spend even more money and make the economy hum along even better? Where is the boundary of this logic?
The basic problems with Keynesian stimulus, in my view, are that it promotes a misallocation of resources, runs up government debt and places bureaucrats in positions that should be occupied by entrepreneurs. Fazzari didn't help me feel better about any of these concerns.
I think that Keynesian stimulus is probably a harmless way of keeping civil servants and politicians busy during normal recessions, but during a so-called "balance sheet recession" Keynesian stimulus looks to me a lot more like early physicians performing bloodlettings, confidently proclaiming success in every case that the treatment doesn't kill the patient.
Fazzari seems like a nice fellow, but I had really hoped for a defense of Keynesian stimulus with a bit more torque and a broader view of how economics interacts with the other moving parts of the political/financial structure.
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You seem to fault Fazzari for not given a Keynesian response to questions and issues he was never really asked about.

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