Brad DeLong on Economists (and non-economists)
by Linda Beale
Brad DeLong on Economists (and non-economists)
crossposted with Ataxingmatter
In Economists (and Non-Economists) Behaving Very Badly Indeed Watch, Brad DeLong accosts the austerity bandwagon that objects to any more federal stimulus, whether from Congress or from the Fed.
At the moment our flow of nominal spending at $14.7 trillion per year is some 12% below its pre-2008 trend. And in the absence of any 12% decline in prices and wages, that shortfall in spending has to produce our current macroeconomic distress: there is not enough “money” to support enough of a flow of spending to chase all the goods we could produce. We don’t have a deficiency of real supply (for whatever reason). We have a deficiency of nominal demand.
This is the problem we all know and recognize. Since the financial crisis hit, banks, corporations and individuals have been deleveraging, and that means not enough money is out there being spent. The stimulus bill was a bare minimum that staved out utter depression, but (on Republican insistence) was larded with much too many tax breaks for big corporations rather than targeted 100% towards the population that would best put the money to work in the economy. Private saving means that public spending has to step into the gap. We did some, but not enough. Jobs were saved, but not enough new jobs were created. Thus, the Fed has a new proposal for a $600 billion stimulus–quantitative easing (essentially, printing money rather than borrowing it). This is a good idea, especially since we can expect either gridlock or Republican policies holding sway in Congress for the next two years, which means that the plight of ordinary Americans will take a back burner to ensuring the “competitiveness” (read–high profits) of US multinationals and cutting federal workers, federal benefits, Social Security and Medicare.
As DeLong notes, even a bunch of conservative economists of times gone by (including Milton Friedman) would say that “it is a central bank’s business to intervene in asset markets to boost the flow of nominal spending back to what everybody expected it to be and counted on it being.”
But today’s wingnuts can’t seem to stomach any reasonable policy that might help someone other than managers and owners of the US MNEs. So DeLong notes:
now we have a bunch of economists and non-economists behaving very badly: saying not only that the government shouldn’t boost its spending but that the central bank shouldn’t buy bonds for cash either.
And they have no real model for how we got into this mess or how we can get out of it. They pretend that the credit mess instigated by big banks was really the Fed’s fault (along with the community reinvestment act–operable for three decades, but nonetheless guilty according to the right and Fannie and Freddie, which came in at the tail end of the action but nonetheless are primary causes according to the right). As Krugman (quoted in DeLong) says:
How do they think we got into a crisis that has depressed employment all around the advanced world? I don’t think they have an answer; I think all they have are wild stories about how Obama’s Sharia-law Marxism has unnerved business, or something, with the effects mysteriously spreading to Spain and Latvia.
And in the name of whatever it is they believe, they’re doing their best to ensure that the slump goes on.
One of DeLong’s commenters has it right, so we might as well end with an excerpt of that comment:
Apparently, [the right-wing, nihilist economists] are right because they say they are right, and they don’t need no stinking facts, models or studies to back their views up. BTW, didn’t we try their way during the Hoover administration and it didn’t work then? Rob in Fl.
Thet were not conservative models that turned the tide. They were models posted by stimulus activists on mark Thoma’s site which looked at the effectiveness of stimulus through the adjustment cycle. Two in particular, one looked at measured multipliers through the business cycle, and one looked at specific austerity programs and there effect. Both showed that the multiplier varied, starting high at the beginning of the collapse and dropping below one after some time has passed. The studies were posted early in the crisis, unfurtunately they were reposted or reviewed 1.5 years later on the same site.
The multiplier efficiency is now arguing in favor of retrenchment in government in these studies.
I would argue, that essentially, Obama has followed Hoover’s lead in 1931 and 1932–ramped up government spending, but not nearly enough and now the GOP is going to cause Obama to follow FDR’s lead in 1936 of cutting back on deficit spending way too soon with the result that the economy will plunge back into deep recession. Certainly, there is no evidence that austerity has worked for Greece or Ireland and I dare to predict it will not work for Britain either. As mad as Michelle Bachmann is, perhaps her attempts to gin up a war with Iran is just sound economic policy given Obama’s reticence and the GOP’s obstruction.
I don’t understand the assertion that QEII is likely to be of any short-term benefit domestically. There is more supply of liquidity than there is demand. So how does adding to supply, with interest rates at historical lows, have any influence on demand. Demand for loans has been on a downward trend going back years.
So, here I am to the left of ‘the Left’ again. I don’t pay much attention to the Right’s arguments so this is not about any of that. It strikes me as odd though that the Keynesians will argue for more stimulus regardless of the circumstances. We are not in a situation anything remotely like that which existed coming out of The Great Depression. Now, savings rates are low, then they were high. Now, demand for high-cost items, especially those all important houses, is beyond low, then… demand for nearly everything was high, now over-consumption and then under-consumption, and so on. The thing is… QEII has no mechanism for putting money where it is needed. And even some economists who are considered liberal in their views, Robert Reich for example, have explained that QE will simply lead to a rise in MA activity and other corporate maneuverings, stock buy-backs etc. Nothing that has anything to do with job creation.
Then too, the Keynesian faithful nearly always accuse their conservative opponents of not supporting their positions; yet this is simply and obviously hypocritical. The questions I raised above for example have been unanswered since before TARP and yet they remain ignored for the most part. Of course there are some lofty arguments about ‘multipliers’, but, those seem rather pale in contrast to the reality of higher unemployment than those same multiplier formula projections missed the mark on. These were forecasts calling for 8% unemployment that turned out to be 10% and etc. So it seems that if anyone has some explaining to do, now, it is these Keynesians who are not confronting some rather unavoidable facts, historical and empirical.
We need to get beyond all of the denial and the political nonsense and then… perhaps we can discuss global AD.
Even without links, “multiplier efficiency is now arguing in favor of retrenchment…”? The goal of stimulus is not that the stimulus be efficient. The goal of stimulus is to improve welfare, through increased employment, wages and consumption, which in turn increase incentives for investment and other productivity and output-lifting efforts. Waving around terms like “multiplier efficiency” as if efficiency itself were the goal is completely wrong-headed. We like efficiency because we get more of what we want for the money spent – more welfare. Low efficiency is not an argument for not trying stimulative policies. It’s just a sad state of affairs, if it is, in fact, the state of affairs.
Very likely right that domestic demand has not risen much, and won’t, in response to the latest round of Fed asset purchass. Foreign demand will, though, and that ain’t nothin’. In addition, we are doing a lovely job of avoiding a big debt roll-over crunch in the next 2 1/2 years or so. There are, what, $2.5 trillion in corporate bonds to re-finance in that period? Corporate debt issuance has been very rapid lately, much of it to retire debt that would have needed rolling in the next few years. There has not been much attention paid to the risk of trouble rolling over corporate debt, what with all the other things there are to worry about, but it is a real risk in a shaky economy. That risk is mitigated everytime some firm issues at today’s low rates to retire debt due at some future date.
So there are at least two sources of gain, though only one of them contributes directly to (domestic) aggregate demand. The other is more like a liquidity program on the sly. May not be the Fed’s intention, but it’s there, nonetheless.
Contra Terry, Obama has followed Hoover’s lead in NOT ramping up Federal spending. As Krugman has pointed out – with graphs and everything, the rate of spending growth has slowed under Obama. So, he underachieved Hoover, who at least went a little above trend.
Both now and in ’30 to ’32, deficits are mainly due to decreased revenues, not increased spending. I’m attaching a graph. Click to expand. Y-scale is in millions of dollars. Spending did ratchet up in ’32, but not really a lot. The first big increase was in ’34.
Receipts in Green, expenditures in red, Surplus/Deficit in purple.
Data from http://www.whitehouse.gov/omb/budget/Historicals/
I think that the Fed would be more than happy not to engage in QE2 if it thought there would be meaningful government spending targeted at increasing domestic demand, but they read newspapers too and anyone who thinks that Boehner is going to preside over spending bills for anything but corporate welfare has rocks in their head. Kharris points out a couple of things that QE2 may do. I have argued that it is at least potentially inflationary, but absent a drop in the unemployment rate, I am probably wrong. To the extent that inflation would occur, it would make deleveraging a bit easier. Bottom line QE2 is not likely to stave off a return to recession, but it is all the Fed can do at this point. As to your take on Keynes, TARP had nothing to with Keynes, the stimulus bill was too small–Krugman said so at the time–and was not very well designed. It still helped a lot and did manage to stop the bleeding. What we need know is a transfusion, but I strongly believe that whatever scabs have formed are going to get picked off with austerity.
Yea, the ‘spillover effect’ is interesting. I in fact presented an argument on Econbrowser to the effect that Bernanke & Co. may be purposely helping the 2nd tier nations via anticipated carry trade activity. Ultimately, if Fin Min Mantega and others do what they are threatening to do, direct purchases of dollars, a unified effort could drive the dollar above current levels. This of course could cost the carry traders big on the way out and so, Wall St. would effectively be duped into stimulating the global economy. If this in fact what Bernanke is up to, it would be highly unusual, but apt. He would then be my hero.
This could also be an effort to end the reserve currency responsibilities. It would seem to follow that as reals, wons, rands, yuans, and etc., are flooding the global markets, dollars could be removed in kind, via T-bill recycling. This would eventually spread reserve status across many currencies, or it could bring a transition to a global currency. About time!
While I think the right is a bunch of buffoons, so are the Democrats who pretty much sealed the austerity platform’s momentum when they totally screwed up the stimulus package (Bush’s “successful” TARP program was also a huge public relations disaster that bolstered the right). Now Pelosi in still in charge, the right really has no plan of attack, high profile congress critters are on the front page with a near dozen ethics violations that make Goldman Sachs look good. What a bunch of fools in Washington, and why are people like Delong even surprised?
Nothing good will ever happen until people wake up to teh fact that both parties are totally corrupt right now.
Everyone who poo-poos H. Hoover should be forced to read his Wiki bio at least twice, three times for dopes like the guy from the post (rob in Fl.). Hoover was in fact a very competent guy who had a progressive streak that makes his being a Repug somewhat anomylous.
Before the crash in ’29 poverty in the US was at 71% (BLS). The industrialists of the time, still though, campaigned hard to lower wages and if not for Hoover they would have done just that. Hoover too had only been in office for about 8 months when the crash occurred so why so much blame is directed his way is questionable on just this one point. I suspect that history needed a whipping-boy and his dispute with industrialists made him an easy target, along with the fact that democrats, were those: ‘winners who write the history’.
“And in the name of whatever it is they believe, they’re doing their best to ensure that the slump goes on.”
You have to think that the Reps are pleased with the current state of affairs. The fact that the recession officially ended last year means that the principal Rep constituency is doing fine, while the fact that unemployment remains high puts pressure on wages, which suits the Reps just fine.
In addition, the belief of Obama and other Dems that the U. S. gov’t is broke means that the “starve the beast” strategy is working and social security and other social programs can be attacked at will.
The worst thing for the Reps would be the economic recovery of average Americans.
First, I am not advocating austerity. I have been arguing from the start that a shortfall in global AD would make recovery impossible if the US were to take responsibility, or were to be forced to accept responsibility, for the downturn (see Guido Mantega the giant slayer). I am basically one those oddballs who thinks global development with ex nihilo dollars is the answer(see B. Bernake the Wall St duper?).
Of course in places like Germany I would not be such an oddball, but here in the states my views are so marginalized I have very few allies. (Germany of course did actually apply some of their stimulus as development aid in poor countries).
As for Tarp being Keynesian, I didn’t say that, I simply used that as a reference point in time for when the conversation about stimulus in general began.
What Krugman says is mostly political BS. He is also wrong as often as he is right. His holding-up the VA for example, as a model of effeciency regarding health-care, is one of the classic blunders of all time. He missed the fact that the VA had a backlog of a million or so patients who in some cases died while waiting for care, other times they found alternative care, and of course what better way to keep costs down than not providing the actual care. Krugman has become sloppy, I’d beware of his influence if I were you.
I gotta go cut some firewood.
JzB: It is quite amazing how conservative Republicans consistently ignore the revenue side of the equation. Perhaps it is by design. (Starve the Beast.) And yet, now we hear they are proposing a 6% national sales tax. That should go a long way toward stimulating demand for domestic consumption, right?