How is the zero bound a myth?
That’s certainly part of it, which I alluded to in my post. The other issue is that if there is a problem, I (not a Libertarian) am prefectly willing for government to support the economy in ways that fix it, through the application of just, even-handed law. Most politicians think of terms of how much money they can throw at the problem, which is an utterly useless proposition: akin to trying to plug a bathtub by dumping water into it. In fact, I support a lot of ecomic changes - with legal support. I just don’t think much of the bailout fever.
I was basically just using your no-brainer comment as a springboard to my point that fiscal austerity is the opinion you would expect to have if you don’t consider the situation. (Not that your opinion is unconsidered, just that it’s the default position.) But really your comment is something of a red herring given that while the current situation is unsustainable in the long term that does nothing to demonstrate that it’s not beneficial in the short term.
I see that Hellestal has addressed this claim and I’ll await your response. I should like to add that my understanding is that the “Dark Age” wing of Economics doesn’t claim that Keyesnian stimulus is difficult to implement but rather that it cannot and doesnot work at all. These are the people providing academic cover for the Tighten Our Belts crowd.
Include me amongst those who find this difficult to swallow. What evidence do you have that this is so?
On what basis are you saying stimulus hasn’t worked? Things could be a lot worse, after all.
From Scott Sumner three cases where fiscal policy has not worked:
I would add that the depression of 1920-1921 was ended without any fiscal stimulus.
Things can always be worse, but the administration said that if the stimulus was not passed unemployment would be at 9%. It is currently at 10%. Therefore the stimulus did not work.
Why the sudden obsession about deficit cutting all of a sudden
There’s a Democrat in the White House.
Bunch of crap. A house catches on fire. The fireman says that if he doesn’t put it out in an hour, five others may catch on fire. He puts it out in an hour, but seven other homes caught fire. Is he a liar? No, he gave you his best judgment. If the stimulus doesn’t pass, unemployment would be far about 10%, perhaps far about 15%.
Diversion tactic. Try to make people forget the previous 8 years and instead remember the memes they’ve been taught.
BobLibDimIf someone tells me if I don’t take a pill I will get sick, and I take it and get sick anyway, he may have been sincere but the pill did not work. There is no basis to say that unemployment would be worse without the stimulus other than a theory which has worked poorly in the past.
Monetary policy has worked much better in the past and has the advantage of not saddling our descendants with huge amounts of debt.
As someone who lives in Ireland, I think you are misrepresenting the situation somewhat.
Firstly, our tax take is down to around 32billion.
After the cuts that you deride, we are still spending over €15billion more than we take in.
We are spending nearly 50% more on daily expenses than we are getting in - we will need to borrow huge amounts over the next few years to keep up spending even at the levels that we will cut it to.
We are borrowing and spending, as well as cutting, because we. have. no. choice.
We simply cannot borrow enough to maintain spending at its current level.
And the drop in income is because our economy was still heading downwards - there is no reason to think that the inevitable cuts did that much damage.
No, he didn’t. His comments were completely inadequate. I didn’t respond to them because down at the bottom of it there isn’t really anything to respond to.
Here’s the blunt end of the stick.
Keynesianist recipes have been tried again and again. They have never worked. Not once. In fact, the only time they have even given the appearance of working is WW2, where it failed and failed and failed again and again. Moreover, the excuses that its defenders constantly vomit forth are themselves strong evidence that it doesn’t work. What damn use is a “solution” which requires that everyone be perfectly in sync? Or demands such awesome levels of debt that only incredible good fortune can possible drag you back from complete fiscal collapse?
Keynes was a smart man. His theories were brilliant. They were also wrong, precisely because they are so elegantly simple. They would work in a perfect world - but such a world wouldn’t need Keynesianist solutions.
Let us examine the Great Depression. The government was able to manufacture GDP. What it didn’t do was actually solve anything of fix the economy. IN fact, Unemployment remained dangerously high during the entire period until World War 2. Then it managed to put lots of people into the armed forces… where they produced nothing of value. It was all about destroying the global economy via mass bombings and wrecking the other guy’s productivity as much as possible. The U.S. won is large part because our economic base was relative defended, and because our people were able to endure total war longer than the Japanese or Germans. In fact, Keynesian solutions became unpopular in the Roosevelt administration precisely because their prevelance had done precisely jack ksquat. As some economic controls were loosened and the postwar era of relative (compared to the New Deal) economic freedom - then the economy really came back. It wasn’t until the late 40’s, with almost total global manufacturing dominance, that America was again healthy economically.
In fact, the New Deal probably hurt business revival in a number of ways (along with the popular but stupid Smoot-Hawley Tariff). Roosevelt’s initial advisors were very much men of the elite Left. They were proto-fascists, and admirers of Mussolini’s concept of the nation as a militant army. As such, a great many of their policies revolved around enlisted workers and businesses into big combines for “efficiency”. Ironically, many of these combines would later be sued by the government itself for the price-fixing the government introduced. Regardless, these policies did not actually make anything more efficient.
In short, you can always pump money into the ecoomy. But government cannot create value. And you ned the latter to overcome a recession. You can water and fertilize the garden - but you can’t cold-forge vegetation. Government can garden and pruine, but it cannot create. Only the people can do that, and the New Deal was at first very hostile to such things, precisely because it viewed people as workers and not individuals.
There are other ways the JCB could cause inflation if it really wanted to. The zero bound just removes the most commonly used method.
Well that all depends on how you feel about the multiplier effect, doesn’t it?
Compared to WHAT? Is this part of the rewriting of history that is trying to present FDR as part of the problem and not part of the solution to the Great Depression?
I would say that puddleglum is perfectly justified in judging the stimulus a failure in that it didn’t live up to the standard set by the Obama Administration. But that is an entirely different thing than saying that it didn’t spur the economy. My point was that we lack a solid comparison. If, for instance, the government were to pump less money into the system for a time and then pump in more we could examine the results. Exactly this happened during the Great Depresssion.
As Hellestal alluded to, in 1936 the opinions of people who agree with you took effect and the federal government contracted the amount of stimulus. After the downturn of '37 this policy was reversed with the predictable (for Keynesians) result of returning the nation to mild economic growth. How is that not a black and white real world refutation of the belief that governmental stimulus is not worthwhile?
Certainly you can point out, as you have, that merely improving our GDP didn’t fix the structural problems in the world economy. But so what? These aren’t just numbers. Fewer Americans starved because FDR intervened in the economy. More people had jobs and could build a future for themselves. Our governmental system didn’t collapse. The point seems irrefutable that governmental stimulus can make up for the lack of private commercial activity during troubled economic times.
As I’ve said, pumping in money has it’s own benefits in the short term (which we are discussing here). I’d like to address this assertion seperately because it seems so astoundingly wrong to me. If an organization takes materials and builds a truck, they have created value. It doesn’t matter if the organization is public or private, governmental or otherwise. Am I missing something? It seems to me that either a truck has value (or it does not) no matter who created it. The interstate highway system is the standard example of how the government can create value. Surely you have encountered these arguments before?
I would add some caveats:
- Everyone’s defecit as a % of GDP has increased
- Ireland was particularly vulnerable to this recession. Some fall in tax reciept was inevitable anyway, how do you know it’s mainly due to cuts?
Your final point is fair, but it’s a not useful for drawing conclusions about what would happen to another economy now. We are on the other end of the recession and have already had a stimulus. The situation is very different.
Nice try, but the matter is far from settled among economists. A 1995 survey (http://www.jstor.org/pss/2123771, I am not aware of any newer ones) showed that half of the economists and a quarter of economic historians agreed, in whole or with stipulations, that the New Deal prolonged the Great Depression.
You are going to have to do a much better job than that.
If you want to accuse the Keynesians of fetishizing government-stimulated GDP over real “value”, then that is absolutely and totally fine. That’s a significantly better argument than the zombie fallacy of the Treasury View that’s been stumbling around the last several years (which is one of the ridiculous arguments that Krugman is referring to with his “dark ages” of macro complaints).
But if that’s the argument that you want to make, then let’s be clear about two important things:
First, this is not an argument against the theoretical effectiveness of Keynesian spending. “Value”, even as you chose to define it, is not an essential ingredient of the spending, and you misunderstand the theory if you believe otherwise. Keynes himself said that his spending could work even if people dig holes and refill them. He was not recommending that course of action–he was saying that any kind of government spending can break the self-reinforcing downward spiral of depression, if there is enough of it. That includes building bombs and blowing them up, building ships and sinking them, etc.
It’s clear that the downward spiral was broken after the war. Everyone agrees on this point. You personally like to drop in some hocus-pocus about deregulation as the cause of the robust growth after the fighting. Well, fine. You can believe what you want here. But even with that, you still have not directly confronted the changed situation after the war, that 1) the population had been at full employment for a long time, thanks to government spending, 2) the incredibly high private debt load from the roaring 20s had been reduced by both inflation and the availability of steady work–the massive private debt thus replaced by strong private savings and a public debt load that could financed at lower interest rates than the previous private debt, and 3) after years of wartime effort, personal household goods were getting old and needing replacing.
All of these factors are indicators of strong aggregate demand, the perfect recipe to break out of a deflationary trap. If you want to throw the deregulation into the mix, that’s fine, but you’re going to have a real hard time convincing anybody that deregulation was a uniquely powerful effect, in light of all those other extensive changes. This is especially true because some of the most important New Deal regulations, especially with respect to labor, weren’t revoked. Labor unions in particular, that special bugbear of conservatives, gained their great strength under FDR and remained as strong in the 1950s as they had ever been before. But they didn’t stop the recovery, did they?
You can make the GDP fetishization argument if you want, but you can’t rely on that alone. You need something more, like the monetarist explanation, because you still can’t sidestep the importance of strong AD after the war, strong AD that was caused (in part) by years of Keynesian spending. You have to confront that difference directly if you want to make an argument against Keynes.
The second important thing to be clear about here is 1937. And your GDP fetishization attack against Keynesian spending fails completely for that particular downturn. It does not apply at all.
You can’t continue to hop over this point as if we were silent about it, as if “there isn’t really anything to respond to”. Blatantly ignoring something is not an indication that it doesn’t exist. Spending was cut, and taxes raised, and that is contractionary fiscal policy. (And remember: if you think raising taxes is contractionary in the short-term, then your beliefs are, in fact, partially Keynesian.) The cuts in spending dropped GDP, but we must keep in mind that private production dropped, too. Private industrial production went down. Why was that? A monetarist would claim that tight monetary policy was primarily responsible. A Keynesian would accept that as a partial answer, but also cite higher taxes and less government spending as factors that were just as essential.
And you? I have no idea what you would say. You didn’t respond to that point.
If you’ve actually discussed somewhere else this massive drop in GDP in 1937, both real and nominal, both public and private spending value disappearing, then please point that out. It’s very important. The large drop of private industrial production in 1937 requires an explanation, right along with strong aggregate demand after the war. If you’re really an old school money guy and I somehow missed that before, then that’s fine. But whatever you do, you can’t continue to point at the value of spending as if that’s an essential factor to Keynesian theory–because it’s not–and you can’t continue to sidestep the stalled economy in 37, when the economy stalled out at the exact same time that both monetary and fiscal stimulus were removed.
Your GDP fetishization argument is solid critique of Keynesianism (I don’t believe it, but at least it’s intellectually consistent). The problem is that it doesn’t work on its own. You need more meat on these bones if you’re going to claim so strongly that Keynes was wrong.
Ignoring that stimulus does not have to create value, the mantra that government cannot create value is clearly absurd. If you support this statement because only people can create, then you must agree that private industry and private corporations cannot create value either. Sure people create value, but both government and industry create the conditions, and provide the funding, under which this value can be created. Spending on the interstate highway system clearly created value. ARPA spending on the Internet clearly created value. NIH funding a researcher who finds a new drug creates value. And I can go on and on.
I’ve done research paid for by the government and paid for by industry, and my paycheck looked more or less the same in either case.