When I took my economics courses, Keynes was king. Keynesianism was the gospel. There was nothing else. To say “We are all Keynesians now” was virtually tautological since the only competing view was a command economy like the Soviet Union’s. Monetarism was a clandestine belief, whispered furtively by economists meeting in close recess and secret conclave in a building somewhere at the University of Chicago.
But the king has been dethroned and there are, indeed, competing views. On his blog former Secretary of Labor Robert Reich calls for a lot more Keynesianism, big time deficit spending to boost the economy:
Let me say this as clearly and forcefully as I can: The federal government should be spending even more than it already is on roads and bridges and schools and parks and everything else we need. It should make up for cutbacks at the state level, and then some. This is the only way to put Americans back to work. We did it during the Depression. It was called the WPA.
as is Paul Krugman in his column in the New York Times:
The conventional wisdom is that trying to help the economy now produces short-term gain at the expense of long-term pain. But as I’ve just pointed out, from the point of view of the nation as a whole that’s not at all how it works. The slump is doing long-term damage to our economy and society, and mitigating that slump will lead to a better future.
What is true is that spending more on recovery and reconstruction would worsen the government’s own fiscal position. But even there, conventional wisdom greatly overstates the case. The true fiscal costs of supporting the economy are surprisingly small.
You see, spending money now means a stronger economy, both in the short run and in the long run. And a stronger economy means more revenues, which offset a large fraction of the upfront cost. Back-of-the-envelope calculations suggest that the offset falls short of 100 percent, so that fiscal stimulus isn’t a complete free lunch. But it costs far less than you’d think from listening to what passes for informed discussion.
As I see it the question is one of empirical facts. Will increased government spending produce more growth in the near term than there would have been otherwise? The economists’ way of saying this is “Is the multiplier greater than 1.0?” Right now the evidence for that appears to be thin. As I noted in a post yesterday there are differing points of view and some who believe that Dr. Krugman’s and Dr. Reich’s prescription is the wrong one have the numbers to back up their claims. To date what I have seen from those holding Dr. Krugman’s view are attacks on the relevance of their opponents’ data or on their interpretation of the data but I have seen them produce no supportive data of their own. That’s what I’d like to see.
To date in this present economic downturn the results are equivocal at best. We have more unemployment now than those who made the decisions said we’d have. That isn’t equivocal. At this point saying “Spend more money!” isn’t enough. I want them to prove their claims. I want to know what would disprove their claims.
I care what is right not who is right and I want to know what is effective. I’m willing to work out the political and societal implications later.
As I see it the problem is that economics is stuck in the 16th century. Once upon a time physics and astronomy weren’t merely physical sciences, they were moral statements. Whether the sun moved around the earth or vice versa wasn’t just a question of physical fact, it was a statement about humanity’s place in the universe.
I think that’s where economics is now. We need to get beyond moral economy, the intersection between moral philosophy and economic activity. What are the facts?
I honestly don’t know how anyone could expect an immediate recovery, whether tax cut or stimulus, given that 70% of our economy was consumption mostly financed by debt that no one can obtain anymore. Nor would it be good for them to obtain it.
Data please.
I think it is more accurate to say that a portion of that consumption was financed by debt that is not so easy to come by these days. To say the entire 70% was mostly debt financed is just flat out wrong since PCE is still a significant portion of GDP.
Oops – I mean the recent growth of that 70% was mostly financed by debt, and changing from debt financed growth to something else takes time.
Meanwhile, watching economists who’ve been warning of too low a savings rate for years make their pitch for a lower savings rate would be highly entertaining if it weren’t for the real people suffering real distress.
Borrowing is borrowing regardless of whether it’s individual consumers taking out the loans or the federal government. I still want to see the numbers.
People like Reich have no underlying theory on which they are basing their analysis and proposals. They are going at it completely ad-hoc. I find them to be quite amusing (well until I start thinking about people being out of work). For example, Reich is mixing the household survey with the establishment survey from the BLS. The units of measure are different hence it is hard to make direct comparisons yet he does. He also has a poor grasp of empirical facts,
By the end of the 1950’s while the debt was greatly reduced it was cut by just under 58% as a percentage of GDP, not quite almost nothing.
Yes, but did the New Deal do that or WWII? Unemployment declined during much of the 1930’s, but GDP was pretty much well below its potential. Why? Was it that the Great Depression was so bad or was it the New Deal Policies that wanted to get rid of competition.
And as for debt lets take a look at Japan. They’ve accumulated a huge amount of debt. Why? Keeping afloat bad banks, the zombie banks, is one reason. Can we say TARP? Sure, I knew you could. These two guys make it seem like if the government just throws enough money at the problem it will go away, then the resulting economic growth will be so vast it will pay for the debt. They’ve turned Supply Side Economics on its head and think that this largely bankrupt view of economics will make sense when its upside down.
Dammit forgot to close an html tag.
I took care of it for you.
I honestly don’t think that’s what Drs. Reich and Krugman are doing. I think they’ve got a moral/political philosophy, drawing their curves to fit the solutions they like, then selecting the data to suit.
1) Most of Barro’s data is generated from WWII. There was widespread rationing and much of the labor force was overseas. His data should be regarded as interesting, but not overly useful.
2) IIRC, GDP had decreased by about 25-30% by the time FDR took office. It then grew at about 10% a year until the recession or 1937. You are contending that it would have grown faster absent the New Deal. With 25% unemployment, from where would you have found the demand. Given the number of banks that collapsed, where was credit going to come from.
3) If WWII cured all, was that deficit spending? Look at the amount of government spending increase just from 1941 to 1942. last, how did we manage to pay down so much of the debt in the 50’s and 60’s with high marginal tax rates?
Steve
1) You need to explain why it’s not useful rather than just asserting it because conditions aren’t perfectly analogous.
2) You’re claiming causality where no causality has been established.
3) I think a better case can be made that the forced savings of WWII was the solution rather than the deficit spending.
1) An economy with severe rationing, where basic commodities were limited is different than ours. How can you possibly compare multipliers in an economy where people could not buy because their options were limited because of the war? Approximately 10 per cent of our men were in the military with many of those overseas. Much of what they earned could not be spent. How much less did their families spend because they were not there? Wouldnt the forced savings of WWII decreased any multiplier effect?
2)Deficit spending has been employed in resolving other recessions, but I’m game, let’s not use it wit the next recession.
3) Interesting. There were certainly large GDP gains with more modest gains in consumption. Wouldnt that better explain the post war boom?
Steve
Meanwhile, watching economists who’ve been warning of too low a savings rate for years make their pitch for a lower savings rate would be highly entertaining if it weren’t for the real people suffering real distress.
Of course, when they were making those pitches the effect would have been a moderation of excessive debt-led growth, the same excessive growth that led to and pumped up the bubble. All depends on your baseline conditions.
Even Keynes had his doubts about Keynesianism. Lucas’ critique is relevant.
I think they’ve got a moral/political philosophy, drawing their curves to fit the solutions they like, then selecting the data to suit.
Bingo.