It Ain’t Necessarily So

John B. Taylor challenges the claim that recoveries after financial crises are always slower. I think his nod to the problems in calculating potential GDP is significant: I’m skeptical that there is any real productive capacity to restore.

14 comments… add one
  • Ben Wolf Link

    If I take ten million people, train them and then put them into factories to produce, productive capacity will increase. What will not happen (sorry, supply-siders) is that aggregate demand for those products at those prices will accompany the additional capacity. If we train them and then stuff them onto farms, requiring farm-land to expand to meet this sort of top-down demand, food production will increase. Demand for food will not necessarily increase with it, though after this summer it just might.

    This is why macroeconomics is so important: broad policies in service to society’s goals are the responsibility of government. Transactions between businesses and firms should be for the most part left to the private sector to figure out.

  • If I take ten million people, train them and then put them into factories to produce, productive capacity will increase.

    Sadly, no. Productivity is not measured in workers or in products but in dollars. If no one wants what’s being produced, you could train 1 billion people to produce it and productivity wouldn’t go up by a sous.

  • steve Link

    What we should say is that production would increase. If no one has money to spend on the new products, there will be no sales. Those 10 million newly employed workers would have money to spend, but I believe Taylor has argued that there is no such thing as a multiplier.

    As to the claim that Taylor challenges the belief that financial crises do not have long recoveries, he found two, yes two, out of many. Reinhardt and Rogoff looked at hundreds. In particular, I am not sure how you would compare the 1907 copper cornering escapade with an international banking crisis like we have just had. I know little about the 1893 crisis, so I will let others comment on that one. (Of note, the crises that came in a series starting in 1907 lead to the creation of the Fed.)

    Steve

  • If no one has money to spend on the new products, there will be no sales.

    That’s absolutely right but it’s only part of our problem. Even if people have money if the production of what they want to buy is elsewhere and the additional sales don’t require more people to process them it won’t increase employment.

    Let’s say you train 10 million people to make buggy whips, give them jobs making buggy whips, and pay them to make the buggy whips to boot. If neither they nor anybody else wants to buy buggy whips but they do want to buy iPhones and LCD TVs and those are made in China, you’ll increase employment in China, put more money into the coffers of Apple, Samsung, and Sony stockholders and not a great deal else. The 10 million will have “jobs”.

    If you wanted to you could do it without going into debt: the Treasury could just spend the money into existence. That would disincentivize private capital investment in other projects that might actually produce some jobs doing something that was worthwhile.

    If we want jobs here, we’ve got to start producing more things that Americans want to buy here or, alternatively, do significantly more exporting than we currently are. Creating make-work jobs and giving people money of itself won’t do it. It will produce more concentration of wealth, though, if that’s what you’re interested in.

    I’ve long thought that our best prospects for producing more for export were oil and gas production, mining, and agriculture but that doesn’t seem to interest the Powers-That-Be.

    I believe Taylor has argued that there is no such thing as a multiplier

    If he’s argued that, I haven’t seen it. What I have read him argue is that the ARRA had a lower Keynesian multiplier, maybe even no multiplier at all, than it otherwise might have due to poor construction and timing. I honestly don’t see how anyone other than the most ideological could believe that the ARRA was optimal.

  • Ben Wolf Link

    @Dave Schuler

    I would consider it more accurate to say that dollars are a metric for productivity. If a command economy places million at work on the farms, it will also logically buy the produce. If we conflate real wealth with financial wealth, we would be forced to conclude GDP has grown, regardless of how much malinvestment has been generated. Dollars themselves are just a convenient representation of that productivity, or perhaps better considered a claim against it.

    I don’t believe there’s any possible way to significantly increase exports and improve our trade-balance short of A) greatly devaluing our currency on the fx market, or B) mirroring the trade practices of other countries point-for-point. If they give a subsidy, we give a subsidy. If they throw up a barrier, we do the same. Godley was a proponent of the former.

  • Ben Wolf Link

    I do object to the classification of government employment as “make-work”. I would argue our economy is in no way served by someone doing absolutely nothing. The unemployed certainly aren’t contributing to productive capacity. If the Federal Employment Administration were to offer a job paying $9 an hour to an unemployed accountant , to teach free public classes on accounting, this is not harmful. If it makes an identical offer to an unemployed waitress for working in a soup kitchen, work which needs doing is being done. Markets function by doing work which is profitable, not by doing work which is necessary. An enormous portion of our financial industry is devoted to “make-work” dreaming up services and products which explode in customer’s faces. I’d much rather subsidize the waitress and accountant who are providing real services than many of our supposed masters of the universe.

  • TastyBits Link

    @Ben Wolf
    post 08-04-2012 12:18 pm

    This is why macroeconomics is so important: broad policies in service to society’s goals are the responsibility of government. …

    WTF!

    We should all strive to do our best. So what? What are the “broad policies”? What are “society’s goals”? These are important, and they are political questions not macroeconomic ones.

  • TastyBits Link

    @Ben Wolf
    post 08-04-2012 7:11 pm

    I would consider it more accurate to say that dollars are a metric for productivity. …

    I would agree, but that is not the technical definition. The technical definition is the one used in the spiffy equations and snazzy charts.

    … Dollars themselves are just a convenient representation of that productivity, or perhaps better considered a claim against it. …

    It is almost sounds like you are saying that dollars are a currency that represent value. I am waiting for you to accept the use of cheeseburgers as a currency.

    If counterfiet-like dollars are used to obtain the productivity represented by real dollars, my actual dollars have been devalued, and I have been robbed.

  • TastyBits Link

    @Ben Wolf
    post 08-04-2012 7:49 pm

    I do object to the classification of government employment as “make-work”. …

    Somehow I am not surprised. “Make-work” is anything that would not be done otherwise.

    … If the Federal Employment Administration were to offer a job paying $9 an hour to an unemployed accountant, to teach free public classes on accounting, this is not harmful. …

    How is it helpful to take money from one entity and give it to another entity which is doing something not needed?

    … If it makes an identical offer to an unemployed waitress for working in a soup kitchen, work which needs doing is being done. …

    WTF!

    “From each according to his ability, to each according to his need.”

    … Markets function by doing work which is profitable, not by doing work which is necessary. …

    WTF!

    Markets facilitate value for value transactions. “Profitable” and “necessary” are determined by an entity according to that which it values.


    … An enormous portion of our financial industry is devoted to “make-work” dreaming up services and products which explode in customer’s faces. …

    This is the direct result of money being artificially injected into the system. This is the problem with not understanding reality. Make money available, and the hustlers will figure out a way to get it. I have never seen a variable for the hustler factor. Where does rigging LIBOR fit into the equations?

  • Drew Link

    It’s all Europes fault. John Personna told me so.

  • The unemployed certainly aren’t contributing to productive capacity. If the Federal Employment Administration were to offer a job paying $9 an hour to an unemployed accountant , to teach free public classes on accounting, this is not harmful

    Will the classes give transferable credits? If so, then that will be “harmful” in the sense that the government will be competition to local schools and universities. If the classes don’t give transferable credits, then who is going to sign-up for such classes?

    What accountant would do that for $9 a hour? Maybe if it was $9/hour on top of UE benefits. If the accountant has kids that $9/hour will cover taxes, childcare maybe gas and not much else. Who is going to develop the curriculum? Is anyone going to supervise these accountants teaching classes, assuming anyone signs up to do it? What about health care benefits? What if no one signs up for the class?

    Hiring people to perform “necessary” work (whatever that means) sounds good in theory, but is problematic after one considers how to implement the program.

  • If I take ten million people, train them and then put them into factories to produce, productive capacity will increase. What will not happen (sorry, supply-siders) is that aggregate demand for those products at those prices will accompany the additional capacity.

    Yeah, to Hell with Jean-Baptiste Say…stupid Frenchmen.

    And when you say supply-siders are you talking about the type that believe in the Laffer curve, or those who hold more of a classical view of economics?

    If we train them and then stuff them onto farms, requiring farm-land to expand to meet this sort of top-down demand, food production will increase. Demand for food will not necessarily increase with it, though after this summer it just might.

    If the price of food products, on average declines, then yes demand would increase in the sense that lower prices would result in higher demand. A “shift” in the demand curve would not occur, but if you are of a classical/neo-classical mindset prices would adjust to equilibrate supply and demand.

    And what do you mean “after this summer”? Are you implying that for some reason this summer there was a “shift in demand”–i.e. demand is higher after the summer at all price levels for some reason exogenous to the “food product markets”? Or do you mean that something like weather–i.e. a drought–will result in a negative supply shock?

    You seem rather confused here.

    This is why macroeconomics is so important: broad policies in service to society’s goals are the responsibility of government.

    But macro is a complete mess. Look at the following list of different schools of thought in macro economics:

    1. Neo-Keynesians,
    2. Monetarists,
    3. New Classicals,
    4. Real Business Cycle Theory,
    5. New Keynesians,
    6. Austrian Business Cycle Theory,
    7. Post Keynesians.

    Those are the “big ones”. You could add the school of thought you are partial too Ben, Modern Monetary Theory/Chartalism (although some might argue it is a subset of Post Keynesian thought…as some might argue RBC is a subset of New Classicals, but what the heck).

    Even within broad schools of thought, e.g. Keynesians, there is disagreement. The example I’ve used before of Mankiw (a New Keynesian) and Krugman (who has decided Keynesian leanings) have very different views, with Krugman often writing rather vitriolic articles/blogs aimed at Mankiw.

    Macro is a complete mess. Basing public policy on something that is a complete mess is probably not going to do much good.

    I would consider it more accurate to say that dollars are a metric for productivity.

    How do you fit this view into your belief that we have a fiat currency system?

    If they give a subsidy, we give a subsidy.

    Yes, paying people to consume our products is a winning strategy.

    If they throw up a barrier, we do the same.

    Yes, less trade is also a winning strategy.

    How is it helpful to take money from one entity and give it to another entity which is doing something not needed?

    Well, if you believe in the magic of multipliers….It is kind of like that old shampoo commercial…I told to friends, and they told two friends and they told two friends, and the screen is soon full of tiny pictures of women…. If that accountant spends $7 out of the $9, and then pretty soon you’ve $30 worth of goods and services!!!

  • Also, consider this article,

    Six Policies Economists Love (And Politicians Hate)

    1. Eliminate the mortgage tax deduction
    2. End tax exempt status for health care benefits
    3. Eliminate corporate income taxes
    4. Eliminate all payroll and income taxes
    5. Tax carbon emissions
    6. Legalize marijuana

    Note that the reasoning behind all of these policies are essentially based in microeconomics. Tax for example the policy of ending payroll and income taxes. The reasoning if you want less of something you tax it. Do we want less income and less payrolls (i.e. employees)? That comes straight from supply and demand analysis and deadweight loss.

    Would all of these policies probably help with economic growth and/or some of our other longer term fiscal policies, and thus indirectly improve the macro picture? I think the answer is probably yes.

  • Steve. your comment reminds me of the reason that from time to time I’ve suggested a jobs program but only in conjunction with structural reforms of the sort you suggest in your post.

    A jobs program is first aid and, worse, in isolation it doesn’t change anything. Or at least not the right things. If, in the presence of serious structural problems, it’s the totality of your policy, when you implement it you’ve distorted the market and you still have all of the underlying structural problems. You’re in a worse situation than the one you started with.

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