Mark Thoma of Economist’s View has an interesting back-and-forth between Jeffrey Sachs and Paul Krugman excerpted from their op-ed and column, respectively, on Dr. Krugmans’s Keynesian prescriptions for solving our economic woes. It’s relatively brief and I can’t excerpt from it without recapitulating it so I recommend reading it in full. I honestly don’t know what to make of it. A few random observations.
First, what Dr. Sachs refers to as “crude Keynesianism” which he attributes to Dr. Krugman is what I’ve been calling “folk Keynesianism”.
empirical ace; ace;adjective
1 : originating in or based on observation or experience
2 : relying on experience or observation alone often without due regard for system and theory
3 : capable of being verified or disproved by observation or experiment
Models are not empirical evidence. They may be derived from data, “observation or experience”, but they are not data. Models prove consistency, i.e. that your conclusions follow from your premises, rather than truth, that your premises are actually correct (and your conclusions follow from them).
As I understand it Dr. Krugman’s explanation of events depends on our being in a liquidity trap, i.e. that people are hoarding cash. Is there really dispositive evidence of this? Can we be in a liquidity trap and have the savings rate go down, as has been the case for the last several years? Is a liquidity trap consistent with very rapid price increases and, consequently, much more money being spent on them, on goods and services consumed by the highest income earners?
I think my own folk Keynesianism, i.e. “spend during recessions, pay down debt during recoveries”, is actually somewhat closer to what Lord Keynes wrote about than what both Drs. Krugman and Thoma are advocating which I would bowdlerize as “spend during recoveries, spend faster during recessions”. That may not be indifferent to the public debt but it sure looks like the next best thing. I would also note that the recovery, such as it is, began in June 2009.
Since there doesn’t seem to be an empirical method of determining whether you’re in a liquidity trap, why is Dr. Krugman’s changing prescriptions between Republican administrations and Democratic administrations not “tax during Republican administrations, spend during Democratic administrations”?
Aren’t there simpler explanations for what’s been happening? For example, unforeseen effects (or foreseen, as some are contending) of policy that have resulted in increasing income inequality? A flight to quality?
Finally, if the problem is that people are hoarding cash because they’re uncertain about the future, isn’t the solution building up their certainty? Go back and look at the last six years. It doesn’t look anybody’s bucking people’s confidence up much to me.
I had trouble reading through to the end; it read as if someone felt that their positions had been unfairly described and in the process of a complete fisking returned the favor. Some critiques warrant a pointed disagreement with a few salient points; the quality can depreciate rapidly.
I think some of the underlying dispute can be framed by the engineer’s triangle of quick, cheap or good, pick two. During the stimulas debate Krugman said the most difficult problem was finding enough to spend on. He didn’t concern anybody with the quality of the spending, he wanted a lot and quickly. It was only after the spending had gone out that Krugman started complaining about the quality.
And the Republican blame suggests fairly poorly of Thoma. The Democrats controlled Congress, and as Krugman acknowledged at the time it would be difficult to find stuff to spend on. The benefit of tax cuts is their speed and coverage, and it was appealing to moderates on both sides. I don’t recall arguments against tax cuts; I recall arguments that one was relatively better than the other.
I came across this quote from Keynes in the German introduction to The General Theory of Employment, Interest and Money:
“The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire.”
Hmmm. Hoarding cash. Are we talking about households or corporations? Similarly for ‘uncertainty’. Corporate profits are at an all-time high, as are corporate cash reserves. I find it hard sometimes to credit uncertainty for the fact that corporations are not spending, expanding, adding jobs, etc. Far easier for me to believe that the real explanation is something along the lines of, “Hey, we’re making a ton of money right now, many tons of money, why change what we’re doing?”
I suppose one could say that that does reflect uncertainty, but not about the viability or survival of the business, more about uncertainty over sustaining these record profits. This reminds me of Orson Welles’s remark about those actors who ratted out themselves and their friends in front of HUAC: “These people,” he said, “weren’t try to save their lives, they were trying to save their swimming pools.”
The irony of it all is that there was only one practical way to get the amount of money spent as fast as it needed to be spent: tax cuts, specifically a FICA holiday on both the employer and employee side. Ideology made that impossible.
PD:
Your quote reminds me of another one (Michael Totten?): lots of people want to run a Stalinist state but nobody wants to live in one.
sam:
I don’t think the numbers on that add up. I looked into it some time ago but haven’t revisited it recently. IIRC most of the cash was being held by a very small number of companies. Apple and GE are the first to come to mind. But the amount corporations were holding wouldn’t be enough to produce the situation that’s being described.
Also, I think a lot of the corporate money is being held overseas.
This whole “debate” reinforces my belief that economics is a fraud science and, except for a few legitimate research areas, is simply a vehicle to reinforce confirmation bias.
Far easier for me to believe that the real explanation is something along the lines of, “Hey, we’re making a ton of money right now, many tons of money, why change what we’re doing?â€
There is always that inclination, by a few, to blend some kind of ‘greedy’ attribute to those stashing a lot of money away — especially when referencing the corporate world. However, government is not helping or making it any easier for big or small businesses to operate, let alone open up new ventures.
While the need for jobs is certainly out there, the business environment remains soured by continuing bureaucratic intervention, varying economic pot holes (ACA raminifications, taxation issues), changing regulations tack strips and the like, which is where that lack of confidence enters the fray.
Lessen onerous restraints and more people would pull forward, taking greater risks with the money they have put aside.
This whole “debate†reinforces my belief that economics is a fraud science and, except for a few legitimate research areas, is simply a vehicle to reinforce confirmation bias.
What fertilizes economics is the psychological aura created around it, giving it either a sense of optimism and reassurance, regarding at least the possibility of positive results, or the opposite —- a air of forbiddance, trepidation, leading to simply a lack of confidence to proceed.
As for corporate money being held oversees, all one has to do is look at Google and its billions that aren’t here in the US. But, because this company supports the current administion there seems to be very little flak generated. Now if it was an Republican person or company, it would be an entirely different story.
I’ve been reading about NAZI Germany (Evans’ Third Reich Trilogy), and it seems that unless your totalitarian state is dedicated to the works of Keynes, its very likely that it too will find itself engaging in crude Keynesianism.
BTW/ The Keynes quote is from September of 1936, and the NAZIs had been engaged in pumping aggregate demand and defecit spending with work projects like the autobahn, or loans/subsidies to labor-intensive manufacturing for at least three years. AFAIK NAZIs took this path on their own and endorsed Keynes’ book after the fact. Anyway, by 1936, Germany was converting to war socialism; all of its resources were being redirected towards rearmament and war, which starved the previously pumped up domestic economy of labor and materials. At that point, war was the only way out.
“The benefit of tax cuts is their speed and coverage, and it was appealing to moderates on both sides.”
And that they get to be spent by private individuals and not government.
jan beat me to it on greed. Bankers are most always greedy; so are corporate executives………and, oh, so are ordinary workers and consumers. Its just not popular to point that out. Better to recognize its simply self interest and not get all childish on us. The only think you really have to check and balance that is relatively robust competition.
There is such a confusing dichotomy in our economical health these days, as illustrated by the increase in food stamps, on one hand, versus how the stock market is doing, on the other.
PD
Interesting and concise overview of the actions leading up to WWII.
And that they get to be spent by private individuals and not government.
Yes, Drew. And, that is the rub, from the government’s POV, as it takes control away from them and puts it more in the hands of the people.
Hmmm….that sounds vaguely familar, like something taken out of our Constitution. Fancy that!
I also will add that money is usually spend more prudently by individuals than through the octopus hand-shuffling so commonly seen in government expenditures, oftentimes overlapping each other.
There is such a confusing dichotomy in our economical health these days, as illustrated by the increase in food stamps, on one hand, versus how the stock market is doing, on the other.
That’s not confusing at all. It’s pretty common. Stalin did well while the Kulaks starved. I doubt Mao suffered much during the Cultural Revolution. Louis XVI did alright in the lead-up to the Revolution. The Castros have allegedly done well despite Cuba being a wreck. I doubt the Perons suffered either. Or Stroesser, or Amin, or Pol Pot, or … or … or …. You’re just confused because you’re not used to thinking of America as that kind of country. Welcome to the land of Hope and Change.
I highly recommend this:
http://www.zerohedge.com/news/2013-03-11/erosion-us-economy-two-words-jobs-and-wages
It weaves various topics Dave writes about commenters comment about. Note in particular:
1. The asset bubble/wealth effect commentary.
2) The point I make about the current (“low,” as conjectured by some dishonest professor) level of taxation as being bogus as measured by tax/GDP ratios (vs tax to income), since GDP can be (and has been) bought by borrowing……………..but you can only pay your taxes out of income.
3) Unemployment stats are fraudulent.
Icepick
All good points. I guess one could equate them with the recent Obama sequester Armageddon rant, followed by him leisurely (and at no little expense to taxpayers) going to play golf with Tiger Woods in Florida. There’s a big verbal-versus-actions gap there!
Drew
Great Zerohedge article! I like some of his expressive terminology such as “phantom wealth.’ in how he fiscally describes a scenario:
The phantom wealth that is conjured by asset bubbles vanishes when the bubbles inevitably pop, leaving all those who borrowed against their ephemeral bubble wealth hapless debt-serfs.
I would hazard a guess that some of those ‘hapless debt serfs’ could be homeowners, student debt holders, and perhaps even stock market experimenters.
If greedy business people always want to increase their ill gotten gains, why would they not use their filthy lucre to generate more cash?
It seems to me that most business people are overly optimistic, and if they seem pessimistic, the future is probably worse.
It seems to me that most business people are overly optimistic, and if they seem pessimistic, the future is probably worse.
I would change that to read cautiously optimistic, Tasty.
For the most part, successful business people read the tea leaves of the future as best they can, in order to calculate the risk factor of an investment opportunity. There are sudden, combustible events that occur, which are out of one’s predictive reach or control. However, when you are looking at a wavering economy, a flood of regulations pouring in after Obama’s election, the fed continuing to rely on printing money to prop up the semblance of a recovery — well, it just doesn’t pass the “let’s go invest” test, IMO.
Here’s an interesting article from the International Business Times explaining why they think corporations like GE, Pfizer, Microsoft, Apple and many others are parking cash abroad.
@Andy- You should listen to the Standup Economist. Among his best lines, paraphrased.
“Macroeconomics gets the big things in economics wrong. Microeconomics gets the little things in economics wrong.”
On topic, I think Sachs and Krugman are having a cat fight, often talking past each other. I went through the General Theory with Cowen when he did a chapter by chapter blog a few years ago. I think your description of countercyclical spending is as good a short description as any. It is what we did up until 1980. It worked pretty well. Then, we just cut taxes w/o changing, or worse increased, spending.
I would also endorse reading the Zerohedge piece. I still cannot help but think that severe inequality is a bad long term proposition for our economy. We are placing all of our marbles into the hands of fewer and fewer people. Most start ups are financed by savings and loans from family and friends. They dont have those resources anymore. That plus health care costs.
Steve