A Critique of Tyler Cowen’s The Great Stagnation, by way of Alex Tabarrok’s Criticism of Keynesian Politics
by Mike Kimel
A Critique of Tyler Cowen’s The Great Stagnation, by way of Alex Tabarrok’s Criticism of Keynesian Politics
Cross posted at the Presimetrics blog
Alex Tabarrok and Tyler Cowen are libertarian professors from George Mason University who post at the very popular Marginal Revolution blog. I often don’t agree with what they write, but its usually well reasoned and grounded in reality. (Unlike, say, what comes up in a number of other libertarian blogs.)
Cowen recently wrote an e-book called The Great Stagnation< I haven’t read it – I’m swamped these days. However, there have been many reviews (and comments by Cowen himself, so I think I can provide a brief summary. Essentially, Cowen notes that in the last few decades (since about the early ’70s), real economic growth in the US has slowed. (That won’t be a surprise if you read Presimetrics.) His thesis is that this has to do with technological development – we’ve eaten the low hanging fruit, and further technological progress (and hence real economic growth) will be slow until we get off the plateau we’re on.
It might seem unrelated, at first, but Cowen’s partner at Marginal Revolution, Alex Tabarrok, recently had written a post that received some comment. Tabarrok argues that whether Keynesian economics can work or not (he does not believe it can – presumably he wouldn’t be a libertarian if he did), Keynesian politics has failed, in that it simply hasn’t been tried in this country, not during the two big economic disasters of the last 100 or so years: the Great Depression and the Great Recession.
Tabarrok is wrong – wrong that Keynesian economics hasn’t been tried, and wrong that it hasn’t worked. And Cowen, it turns out, is wrong about exactly the same thing in his book.
The basic Keynesian idea is this: economic downturns (and meltdowns) can occur and/or be prolonged and worsened when the private sector becomes worried and cuts back. In those circumstances, the government should step in and buy things, lots and lots of things, replacing the shrunken private sector demand. Once the economy picks up again, the government should cut back on its spending and start saving up money, first to pay for its recent spending bout and second to have cash in hand to cover its next necessary spending bout.
Put another way – a government thinking along Keynesian lines will tend to run a deficit when real private sector spending falls below some prior highwater mark. It will run a surplus in years real spending exceeds prior real private sector spending. There may, of course, be exceptions in any given year, but a Keynesian government will generally follow that sort of behavior. A government that runs a deficit when real private sector spending is rising, or runs a surplus when real private sector spending is falling, and behaves this way in general is most definitely not operating under Keynesian principles.
Which brings us to data. Surplus and deficit information was computed using current federal gov’t receipts and expenditures from the BEA’s NIPA Table 3.2 Real private sector spending is made up of real “personal consumption expenditures” and real “gross private domestic investment” from BEA’s NIPA Table 1.1.5 Data goes back to 1929, the first year for which the BEA computed data.
The following graph may look a bit odd, since it has no curve on it. But it shows something cool. If I did this correctly, the gray bars show periods when:
1. real private sector spending hit a new high and the government ran a surplus
2. real private sector spending fell below a previous high and the government ran a deficit
Keynesian governments will generally behave in that way. The turquoise bars show non-Keynesian behavior:
1. real private sector spending hit a new high and the government ran a deficit
2. real private sector spending fell below a previous high and the government ran a surplus
Here’s what it looks like:
Figure 1
Here’s what I get from this graph… from until some time around the late 60s or early 70s, US governments generally stuck to Keynesian policies and not incidentally, generally produced relatively rapid growth. After that, the US government generally abandoned Keynesian policies and produced Tyler Cowen’s Great Stagnation. I am not prepared on to comment on whether there has been technological stagnation though.
Perhaps the graph can be improved. Its important not to consider individual years Keynesian or not, but rather overall behavior over a number of years. For instance, the fact that the government ran a deficit during the recession in 1990 – 1991 doesn’t make it Keynesian behavior (though it does appear to have a gray graph) since it had been running a deficit already, even when times were good. Running a deficit when times are bad is only Keynesian if you’re paying down debt (i.e., running a surplus) when times are good. The fact that the government has been running a deficit more or less continuously since the late 1960s (except for a brief period in the 90s) indicates that it definitely wasn’t following Keynesian economic theory – else it would be running surpluses when real private spending was up.
Well, gotta run. As always, if you want my spreadsheet, drop me a line. I’m at my first name (mike) period my last name (one m only in my last name!!!) at gmail period com. And don’t forget which post your writing about. Toodle-oo, folks.
Mike
you also need to look at what the government spent money on. you can tell, at least intuitively, whether something counts as “investment” or it’s just spending. hell, you can tell that about private sector spending also… are “savings” going into investments with some productivity potential, or just going into schemes to make more money.
i can’t imagine that the information technology revolution escaped Cowan’s notice, but i am reasonably sure that other technology has been growing geometrically during all this time. Cowan may be “well reasoned” but he has no knowledge whatsoever of actual science, or basic reality.
A couple of observations, been doing a lot of fiddling with hsitory tables from 2012 budget and reading a book about the demobilization after WW II leading to myhts of unpreparedness in June 1950.
Some observations: 45-50’s, 55-65, 75-80 definitiely Keynesian, paying down WW II debt, Truman was a fanatic in getting it paid off. Ike and Kennedy as well, Ford/Carter paying off Vietnam Keynesian response to debt raised for war.
Interesting to look at peaks in war spending since 1962 Table 8-8 President’s budget in constant 2005$): 1969 non Keynesian, 1989 Non Keynesian, 2010 (growing still) Keynesian.
Why is this different?
When has high war not included inflation, etc?
Culturally, in prior to voodoo economics the republicans were virulently anti debt. And some democrats lik JFK as well.
Ideas?
Geo polical economics?
It occurred to me a while ago, that if the over all concern in an economy is modulation (never go too far in either direction, invisible hand, great moderation etc) there is only one way to have that: An entity large enough to counter the modulation of the all inclusive “market”. In mechanical terms, a counter balance that absorbs the oscillations.
As Greenspan acknowledged, no one private entity can be trusted to be the counter to the market. Thus, you only have democratic government that can be trusted and which is large enough to accomplish such.
We should be demanding that our government do exactly as Keynes suggests. For the government to act otherwise is to have the largest single player in the economy acting exactly like the private participants (individual and corps) in the economy. At the moment government acts in such a way, the government has become competitive to the private sector within the market. It is at this point “crowding out” truly materializes. Crowding out happens not when the government purchase, but when the government acts as a market participant by acting as all the other non-government participant.
It is rational for people to tighten their belts when money is short. It is rational for lending not to happen to people when money is not available to pay it back. When money is short, everything slows and even reverses. With government acting as a rational individual would, then by definition of a rational participant they are a competitor in the market and are the largest competitor in the market as government is in essence pocketing the money.
However, if government act counter to the market, government is no longer a competitor as it is acting outside the market. It is acting within the economy. It is the position proper. The economy is not the market. The market is only a part of the economy. The government is not the market.
Keynes has it correct and not just because of his economic theories but (whether he understood such) because it recognizes the proper understanding of a democratic governance system. The government exists to reduce risk. Democratic government is the only entity large enough to absorb all risk of any type simply because it is free of the singular great risk: death.
Of course to keep such governance, an entity that is immortal requires keeping it democratic
The market is not the economy, it is only part of the economy.
wish I had said that.
Does real government debt behave similarly? As long as the deficit is below the growth rate the debt burden is lightening. This shouldn’t make much difference before the 70s, but might in the 90s.
I haven’t read Cowen either. I also haven’t read what I consider to be an obvious critique. Slow technological progress should show up as low productivity growth. I will discuss labor productivity (because I like too and because measurement of the capital stock has changed).
That means the slowdowns are two separate slowdowns — low productivity growth roughly 1970 till mid 90s and low employment growth March 2001 on. Only the product — GDP — shows a simple pattern which would correspond to a simple low haning fruit theory. I think it is clear that there was a true productivity slowdown from 1970 to around 1995 (this is low labor productivity growth partly due to a huge increases in labor supply and also shifting out of oil and low total factor productivity growth because TFP growth was absurdly miss-measured) . The Bush and the Republicans making a mess of things.
The fact is that post 1970, when Democrats are in power, GDP is, on average, fine. I know Cowen finds this fact puzzling but he sure hasn’t found the explanation.
Basically this means I agree with you (but no shocker there).
Lord – an old post: http://www.angrybearblog.com/2007/12/republican-party-and-national-debt.html
Kinda ties in with ILSM’s comment too.
coberly,
I believe Cowen talks about the technology showing up, but the recent tech being of the sort that is not adding to GDP figures.
Robert Waldman,
I suspect Cowen has not looked at things by President and by party. You may recall McArdle’s indignant reaction to that, complete with a frightening misunderstanding of t-statistics. Cactus and his band of merry madmen, indeed.
But… that said, something I noted a few times… sooner or later it would occur to the Dems that they get excoriated for being fiscally irresponsible every time, even though the only Presidents to run up debt since WW2 happened to be Ford, Reagan, Bush 1 and Bush 2. And once it did, you’d have a Dem doing irresponsible $#^& too. Well, that day came in January of 2009, apparently. I wouldn’t expect Dems to do just fine, on average, going forward either, unless they start unlearning the lesson that Obama apparently learned.
The stagflation is due to the fact that the rich are getting richer. As their portion of the income and wealth gets larger and lerger there is less and less money in the productive economy. Most of the money that the rich have goes into the speculative economy where it generates boom and bust cycles. The only thing that is keeping the economy from collapsing is the deficit spending of the federal government.
Lord – an old post: http://www.angrybearblog.com/2007/12/republican-party-and-national-debt.html
Kinda ties in with ILSM’s comment too.
coberly,
I believe Cowen talks about the technology showing up, but the recent tech being of the sort that is not adding to GDP figures.
Robert Waldman,
I suspect Cowen has not looked at things by President and by party. You may recall McArdle’s indignant reaction to that, complete with a frightening misunderstanding of t-statistics. Cactus and his band of merry madmen, indeed.
But… that said, something I noted a few times… sooner or later it would occur to the Dems that they get excoriated for being fiscally irresponsible every time, even though the only Presidents to run up debt since WW2 happened to be Ford, Reagan, Bush 1 and Bush 2. And once it did, you’d have a Dem doing irresponsible $#^& too. Well, that day came in January of 2009, apparently. I wouldn’t expect Dems to do just fine, on average, going forward either, unless they start unlearning the lesson that Obama apparently learned.
Waldman asserts that TFP has been mismeasured. I’m interested in why he thinks so.
The BLS maintains a database of annual TFP for the US back to 1948. A good source of information on TFP growth prior to that is a few of papers by Alexander J. Field: “US economic growth in the gilded age”, “The Most Technologically Progressive Decade of the Century” and “The origins of US total factor productivity growth in the golden age”.
Average annual TFP growth is as follows:
1835-1855-0%
1855-1869/1878-(-0.5%)
1869/1878-1892-2.0%
1892-1919-1.1%
1919-1929-2.0%
1929-1941-2.8%
1941-1948-0.5%
1948-1973-1.9%
1973-1995-0.5%
1995-2005-1.5%
The first thing that should grab your attention is that TFP growth was at its most rapid during the Great Depression. The second thing you should observe is that TFP growth was at 1.9% or higher from the 1870s through 1973 with the exception of 1892-1919 and 1941-1948. TFP growth has picked up since 1995 (but has slowed since 2005). So this pretty much supports Tyler Cowen’s conjecture.
Now, why was TFP growth faster during the periods mentioned?
Well, Field analyzes the growth by sector and sector size and comes to some interesting conclusions. TFP growth was fast from the 1870s through 1892 because of railroads (which peaked in track mileage in 1916) and to a much lesser extent because of the telegraph. Almost all growth in TFP in the 1920s can be accounted for by manufacturing and that probably fed that decade’s stock market boom. Why did manufacturing TFP explode in the 1920s? According to Field it was due to the widespread electrification of factories (which had started in the 1880s). In the 1930s manufacturing TFP, although still relatively fast, slowed down. (He also points out that private R&D quintipled from 1929-1941.) But transportation TFP soared from 1929-1941 mainly due to the five fold increase in the share of tons-miles hauled by interstate trucking and its interaction with railroad transportation. (The US built its first interstate highway system in the 1930s.) And he argues that transportation TFP was largely responsible for the growth seen from 1948-1973, as manufacturing TFP actually went negative for part of that period. (And recall the Interstate Highway System, built on top of or paralleling the US Route system of the 1930s was largely completed from 1956-1973.) TFP growth was negative from 1855 to the 1870s primarily because of the Civil War.
Recent work by Bart van Ark shows that TFP in the distribution sector was the main source of the surge in growth from 1995-2005, and he argues that was due to the widespread adoption of ICT technology by that sector. (Think big box Walmarts.)
What’s interesting is that Federal government money played a major role in all of those developments with the exception of factory electrification (urban areas were largely electrified with private money). This of course comes with the qualifier that much of public fixed investment is probably nonproductive. But evidently some of it mattered a great deal.