Ezra Klein was not a good student in high school or, I believe, in college. I have no evidence that he ever took an economics course and presume he relies for his views on economics on the advice of those with whom he agrees politically. In his latest New York Times column on how differently the challenges facing President Biden are from those that President Obama faced, after a number of claims with which I strongly disagree, he finally arrives at a conclusion with which I agree:
So Biden’s task now is clear: to build a government that can create supply, not just demand.
This may not be the presidency Biden prepared for, but it’s the one he got.
First, let’s return to something that’s axiomatic:
Inflation = Nominal GDP – Real GDP
7% inflation means that consumption is growing faster than production. Why? I think there are multiple reason including lack of confidence, misplaced taxes, regulations that discourage production, and the continuing attractiveness of the financial sector over production.
Here’s an example of a claim of Mr. Klein’s with which I disagree:
The 2009 stimulus was too small, and while we avoided a second Great Depression, we sank into an achingly slow recovery.
As evidence that is incorrect I submit the following
- the testimony of Dr. Lawrence Summers that the size of the stimulus was exactly right
- the NBER declared the recession over before a single dollar of the ARRA “stimulus package” had been disbursed
Under the circumstances quite to the contrary if the 2009 stimulus had been larger President Obama would have faced exactly the same problem that President Biden is facing now. We don’t produce enough.
Nonetheless I look with foreboding at federal government measures to stimulate production. I think the members of Congress will be overwhelmingly tempted to continue to stimulate consumption and merely try to rebrand consumption as production. It’s all they know.
What would a program to stimulate domestic production look like? I suspect it would need to consist of both carrots and sticks, carrots in the form of grants for specific largescale projects and sticks in the form of new taxes on buying and selling equities. They’d also need to abandon rhetoric about greedy capitalists, something I can’t imagine.
1) In the most recent comments i can find from Summers he says the stimulus was too small. (Also said the recent stimulus was too large.)
2) The recession was over. Klein was commenting upon the recovery.
https://www.newyorker.com/news/annals-of-populism/larry-summers-versus-the-stimulus
Steve
In December 2008 he said emphatically that the stimulus was just the right size. Had it been made larger it would just have boosted consumption without boosting production. That is supported by the recession having ended before ANY of its funds had been disbursed.
Dave Schuler: We don’t produce enough.
Demand will tend to encourage production to meet the demand, especially if the stimulus is replacing demand that was diminished by the economic slowdown. The 2009 stimulus was too small, as can be seen by the slow recovery.
Of course, support was necessary during the shutdowns. However, demand is not the problem today, but problems with the supply chain, and the accompanying and continuing damage to the supply chain as business retreats.
To address supply chain problems, the best governmental solution was significant infrastructure spending in 2009. That was when there was excess capacity in the economic system. The second best governmental solution is significant infrastructure spending now.
“The best time to plant a tree was 20 years ago. The second best time is now.†— Chinese proverb
But not necessarily in the United States. That’s been our history over the last 30 years. It’s why we’re excessively dependent on China right now, something being characterized as “supply chain problems”.
I probably should define my terms before my next comment. By “infrastructure” I mean traditional infrastructure: roads, bridges, ports, etc. I’m skeptical that increased infrastructure will have much impact on production. We already have an interstate within a few miles of every city of 50,000 population or greater. We’re not maintaining them because that’s the responsibility of state and local governments and they have greater priorities. If those interstates were really that helpful, the state and local governments would be maintaining them as they’re supposed to do.
China’s situation is different. Their infrastructure spending was smart because they needed it. Our doing the same thing would have been dumb because we didn’t need it. Tom Friedman’s complaint that our airports are 40 years old while China’s are new ignores that we’ve had a full-fledged air transport system for more than 40 years while the Chinese just developed theirs.
And I think you’re misquoting the saying. It’s Guan Zhong.
I believe that’s the source of the sentiment you’re citing.
Dave Schuler: But not necessarily in the United States.
That wouldn’t matter as far as inflation goes, as long as production can meet the demand.
Dave Schuler: I mean traditional infrastructure: roads, bridges, ports, etc. I’m skeptical that increased infrastructure will have much impact on production.
Decayed infrastructure does have an effect on delivery of products and components, so has an impact on production. More important, modern infrastructure is far more than roads. If the U.S. is to be competitive, it can’t do it by producing products that can just as easily be made elsewhere.
The Chinese proverb is apocryphal, but the sentiment is appropriate to the discussion.
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“In December 2008”
He has had 13 years to think it over and actually see what happened.
“That is supported by the recession having ended before ANY of its funds had been disbursed.”
Most of us would like the economy to be a bit better than just not in a recession. So if, arguendo, you called it recession when GDP growth was negative then we would not be in a recession if growth was 0.1%. Th purpose of the stimulus was not to just get out of the recession but also to start a recovery. Klein makes the case that too small a stimulus lead to a weal recovery and it sure seems like Summers actually agrees. (What did you really expect him to say when he was part of the team deciding upon the size of the stimulus?)
Steve
I think Klein is wrong in the sense that he believes whatever the case in a downturn, the solution is always fiscal stimulus above the current baseline (because progressive technocrats like Klein don’t really consider “normal” deficit spending to be stimulus). Therefore the main problem is determining how much the stimulus should be and who it should benefit from it.
“because progressive technocrats like Klein don’t really consider “normal†deficit spending to be stimulus”
Out of curiosity, who does?
Pretty clear both parties believe in further stimulus beyond what is normal, just one does it with spending and the other with tax cuts.
Steve
Andy: (because progressive technocrats like Klein don’t really consider “normal†deficit spending to be stimulus)
That would be economists generally. The money supply has to increase as the economy expands. Inflation below the GDP growth rate is not generally inflationary or a problem for long-term growth.
You might want to re-read Keynes. Not all debt-fueled spending is stimulus. Your third sentence is the observation of MMT:
and I agree with it. Present inflation is around 7%; present GDP growth rate is around 2.3%.
Dave Schuler: Not all debt-fueled spending is stimulus.
No. Indeed, we said just the opposite. Some debt-fueled spending is not stimulus, in this case, “normal” deficit spending that merely keeps up with growth. (More generally, debt-fueled spending does not stimulate an economy when there is there is no excess capacity.)