Questions for Keynesians
A number of Keynesian bloggers have recently expressed dismay that the rest of us don’t buy their model. Maybe it would help if they’d stop ignoring our criticisms of their model, and respond to our complaints. Here are some questions:
1. What is the proper measure of austerity? The textbooks talk about deficits. But most of the Keynesian bloggers focus on government purchases. So which is it? And if it’s purchases, why did these same bloggers claim that austerity would result from big tax increases in the US in 2013, and a big tax increase in Japan in 2014? And why does the measure chosen (ex post) usually seem to be the one that best supports their argument in that particular case?
2. Why do Keynesians show cross-sectional graphs of fiscal austerity and growth, mixing in countries that have their own independent monetary policy, with those that do not? (I.e. those lacking monetary offset.) And why don’t they respond to criticisms of those graphs? And why tout cross-sectional studies of fiscal policy at the level of American states, when no American state has an independent monetary policy?
3. Why claim that fiscal policy can be effective in the special case where a country is at the zero bound, and then claim that austerity caused the eurozone double-dip recession even though at the time the eurozone was not at the zero bound? The eurozone’s positive interest rates were prima facie evidence that the ECB had inflation right where it wanted it until 2013, or else they would have further cut their interest rate target.
4. When claiming that fiscal austerity reduced aggregate demand, why do Keynesians almost always provide data for RGDP growth, when NGDP growth is a much better proxy for AD? NGDP is a direct test for AD shocks, whereas RGDP can be impacted by either AD or AS. RGDP doesn’t show AD changes, it shows aggregate quantity demanded. RGDP rose in the US between 1865-96, was that more AD, or more quantity demand as supply rose?
5. The transmission mechanism between AD and RGDP in the Keynesian model runs through jobs. So why claim that low British RGDP growth was due to austerity when in an accounting sense it was almost all productivity—employment keeps hitting record highs? Is there a new Keynesian model I don’t know about where austerity kills output without killing jobs? A sort of reverse neutron bomb?
6. Why did Keynesians say that 2013 austerity in the US will be a test of market monetarism, and that slow growth in Britain “proves” austerity doesn’t work, but then when 2013 comes out with almost twice the US RGDP growth as 2012 (Q4 over Q4), they suddenly say that anecdotal evidence doesn’t matter?
7. Why act like anti-Keynesians are bizarre heterodox economists, who reject mainstream macroeconomics, when it is the modern Keynesians who have recently rejected the claim in the #1 monetary textbook in America that monetary policy remains effective at the zero bound. Keynesians have walked away from the standard textbook natural rate model that after 4 or 5 years wages and prices will adjust to a demand shock and employment will go back to the natural rate. Keynesians now talk about “paradox of toil,” and claim that employer-side payroll tax cuts (or wage flexibility) are not expansionary. Keynesians now claim that extended unemployment insurance doesn’t increase unemployment, even though they once said it did, and empirical studies show that the effect on unemployment was even positive in cities with extremely high unemployment rates.
Here’s Paul Krugman in 1999, a year after he wrote his famous “expectations trap” paper of 1998:
What continues to amaze me is this: Japan’s current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do – even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy – the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance – are rejected as dangerously radical and unbecoming of a dignified economy.
Will somebody please explain this to me?
Yes, and when you are done then please explain it to me.
Update: I’d also love to know what Keynesians think of the Dems having a socialist as their lead member on the Senate Budget Committee, who then appoints a MMTer to be chief economist. And Krugman says the GOP relies on voodoo economics!
HT: Jon
Tags:
12. January 2015 at 06:54
and now we have an MMTer appointed to be minority chief economist on the senate budget committee and the nytimes runs a fawning article. My Facebook fed lit up with part operatives liking and sharing said article for its fresh view.
The bad reasoning is cancerous.
12. January 2015 at 07:04
1. Measure of austerity – see Robert Waldman’s comment in http://delong.typepad.com/sdj/2015/01/over-at-equitable-growth-yes-the-past-four-years-are-powerful-evidence-for-the-keynesian-view-of-what-happens-at-the-zero-l.html
3. That fiscal policy is effective at the ZLB doesn’t mean it isn’t effective elsewhere.
12. January 2015 at 07:25
As I believe one Sheldon Cooper would say, “Bazinga!”
12. January 2015 at 07:27
@foosion
The consensus view is that fiscal policy isn’t effective when rates are above zero.
“The crucial thing from a macroeconomic point of view is that leveraging and deleveraging are not symmetric in their effects. Leveraging up, other things equal, leads to high aggregate demand “” but this can be and is in practice offset by the central bank, which can always raise rates. Deleveraging, on the other hand, can’t be offset equally easily; the central bank can cut rates, but only to zero, and unconventional monetary policy is both controversial and an iffy proposition (which doesn’t mean that it shouldn’t be tried).
So a large leveraging/deleveraging cycle is likely to be followed by a persistent shortfall in aggregate demand that can’t be cured using ordinary monetary policy; what I consider depression economics.
Now, the same thing that makes deleveraging so hard to handle also makes the fiscal multiplier larger than it is in normal times. Normally, expansionary fiscal policy is offset by monetary tightening, contractionary policy by monetary loosening. Hence the lowish multiplier estimates based on recent history.”
http://krugman.blogs.nytimes.com/2012/10/09/deleveraging-shocks-and-the-multiplier-sort-of-wonkish/
12. January 2015 at 07:32
If there had been agreement about the efficacy of monetary offset at the zero bound, I don’t see how an MMT appointment to the Senate budget committee would have been possible. How exactly might that national political discussion play out? Government as the solution to all marketplace problems? If that’s so, maybe they can “fix” the fact that of more than 3,000 counties, only 65 have recovered from recession.
http://blogs.wsj.com/economics/2015/01/12/of-more-than-3000-u-s-counties-just-65-have-recovered-from-recession-naco-says/?mod=WSJBlog
12. January 2015 at 07:39
@SG It’s not that fiscal policy is ineffective in the abstract, it’s that monetary policy might offset fiscal policy. The consensus is that monetary policy can offset fiscal policy above the ZLB. Scott maintains that it can also offset at the ZLB, while Krugman finds an asymmetry.
Whether fiscal policy is effective in the face of neutral monetary policy depends entirely on your definition of neutral monetary policy.
12. January 2015 at 07:45
@Becky, Krugman and others would say that the reason govt hasn’t fixed the recession is that it hasn’t tried hard enough. They point out that the federal stimulus bill was too small and all subsequent efforts were blocked, especially looking at combined federal, state and local govt actions.
Consensus is different than universal agreement.
12. January 2015 at 08:00
“7. Why act like anti-Keynesians are bizarre heterodox economists, who reject mainstream macroeconomics, when it is the modern Keynesians who have recently rejected the claim in the #1 monetary textbook in America that monetary policy remains effective at the zero bound.”
I thought they DON’T reject that monetary policy is effective at the ZLB. I thought the claim they keep making is that central banks will NOT fully use monetary policy at the zero bound to “maintain confidence in their current monetary regime”. Long term inflation pegged at 2%, for example.
12. January 2015 at 08:18
Jon, And Krugman criticizes the GOP for relying on zany supply-siders.
foosion, Doesn’t Krugman claim it’s only effective at the zero bound, and that otherwise you have monetary offset?
Elwailly, Depends which Keynesian, and which day of the week.
12. January 2015 at 08:26
Saturos, I don’t know who Sheldon Cooper is or what bazinga means, so I’ll assume it’s all good.
12. January 2015 at 08:30
@Scott,
Sheldon Cooper is the main character in The Big Bang Theory. Bazinga is his term when he kids someone or nails someone. So yet, it’s “all good.”
12. January 2015 at 08:44
@Scott, Elwailly, there are two questions – can monetary policy offset fiscal policy and will monetary policy offset fiscal policy.
Are we agreed that central banks aren’t doing enough to hit their 2% inflation targets or Scott’s NGDP target?
Are we agreed that central banks could lower inflation and NGDP growth if they wanted?
How about agreement that their reaction function is biased towards tightening?
12. January 2015 at 09:29
The federal stimulus of 2009 was pretty small in relative terms and poorly targeted.
It was offset by reduced spending by the states, who have to pay as they go.
I would be interested to see arguments in favor of a helicopter drop type of stimulus, in which we ran up a $2 or $3t deficit and just sent checks to everybody who files a tax return.
It’s interesting to me that everybody seems to agree that Japan’s deficit spending is unsustainable, yet it continues to work for them.
I sort of wonder why I’m paying federal taxes when we could just issue a bunch of T-bonds at 0 percent and have the central bank buy them.
12. January 2015 at 09:43
@ foosion
1) Central banks are absolutely not doing enough to hit their 2% inflation target (neither the Fed or the ECB)… if the target is 2%, one would have to assume that inflation must spend an equivalent amount of time about 2% as below 2%… this is not the case. Actually policy treats the 2% target as a cap and therefore, central banks can get away with not doing there job as long as inflation remains below 2%.
2) Central banks can without a doubt steer the direction of NGDP and inflation. I don’t think anyone would deny that.
3) I would agree with you that most Western Central banks have a biased toward tightening for political reasons. Politically, it would be difficult to explain to the public why 3% or 4% inflation may be a good thing. Economists like Scott here, who have much more credibility, are trying to help change the argument and focus on all those individuals on LT and ST unemployment. The Fed gets held accountable for inflation, not employment even though there dual mandate requires them to focus on both aspects. Higher NGDP growth (or stable NGDP growth) would be better for employment. I think Scott does an excellent job of explaining why central banks need to be held more accountable, and an NGDP level target would be a good policy to help accountability.
P.S. I know your questions was directed at Scott and Elwailly, but I figured I’d take a stab at it.
12. January 2015 at 10:10
@Tom, I sometimes believe Scott’s greatest contribution to the political debate is to talk about NGDP rather than inflation. The public doesn’t like inflation but likes higher NGDP, even if in practice they imply the same policy actions. Talking about NGDP allows the Fed to do the right thing, while talk of inflation encounters resistance.
BTW, it does not appear to be the case that everyone agrees central banks can always raise inflation. That’s the issue about asymmetry at the zero lower bound.
12. January 2015 at 10:21
Hi Scott,
I think #2 is a case of talking past each other. If economies are in a liquidity trap and monetary policy is ineffective (according to ‘Keynesians’), then it doesn’t matter what their monetary policy is unless it is ‘credibly irresponsible’. ‘Keynesians’ don’t ignore monetary offset arguments — the defining feature of the liquidity trap is that monetary offset doesn’t work. That means arguments with monetary offset are considered to have been “asked and answered”. Maybe Keynesians should call the liquidity trap “monetary offset failure”; it would make the essence of the argument (as observed from and outsider like me) much clearer:
Keynesian: “Economy X has monetary offset failure.”
Monetarist: “But what about monetary offset?”
Actually, I think this does a fair job of addressing points #1, #2, #3 and #4. The model has two regimes where monetary offset is either important or not (the “ZLB” tends to be a good indicator, but is not the only factor), is framed in terms of NGDP and can be used to determine the best measure of “austerity” through different counterfactuals:
http://informationtransfereconomics.blogspot.com/2015/01/keynesianism-and-ngdp-growth.html
(sorry for the long comment)
12. January 2015 at 10:23
@ Foosion
I think the debate on inflation is more along the lines of permanent or temporary increases.
* If the central bank increases the Money Supply but explains that if inflation were to rise to 3%, it would pull money back out- then markets would adjust differently then if the central bank were to announce a permanent injection. If the market expects a permanent change, there would be more inflation.
People always underestimate market expectations and I’m surprised that an individual like Yellen, who was one of the foremost economists discussing the importance of communication and forward guidance has done a mediocre job at just that.
P.S.- the zero lower bond argument is based on the assumption that markets expect a temporary increase. This is something P.K. and most keynesian economists like to overlook. They place too much importance on interest rates and not enough on market expectations.
Think Fisher Equation…
real interest rate= nominal interest rate – inflation expectations
Ok, even if nominal interest rates are at the zero lower bound, if the fed can adjust inflation expectations, then they can be HIGHLY EFFECTIVE at the lower bound.
This again leads back to communication and forward guidance.
12. January 2015 at 11:25
“7. Keynesians have walked away from the standard textbook natural rate model that after 4 or 5 years wages and prices will adjust to a demand shock and employment will go back to the natural rate. ”
My understanding of the post Keynesian position is that they reject the natural rate model and the concept of general equilibrium because they believe the real world is always in disequilibrium (a series of short runs) and that there is no one “natural” rate for all commodities.
I remember some good blog posts from Lars Christensen a year ago discussing how the monetary regime could make an economy look Keynesian or look Classical depending on what the central bank was doing. It was a real good read for a lay person like myself.
http://marketmonetarist.com/2014/01/23/no-general-theory-should-ignore-the-monetary-policy-rule/
12. January 2015 at 11:29
@ Tom M
I also think very highly of Dr Sumner and the importance of his ideas. It seems to me, however, that Dr Krugman and he talk past each other.
– Both sides agree that the Fed can offset fiscal policy to any extent it chooses
– Both sides agree the Fed hasn’t done enough this cycle
– One side says monetary offset is ineffective at the zero bound because the Fed chooses not to make it effective. The other side hears “monetary offset is ineffective” and cries foul.
– Let’s assume the Fed has its STANCE exactly where it wants it.
– Two possibilities now. A) The Fed likes the implied NGDP path or B) the Fed dislikes the implied NGDP path (but is politically bound) and wishes other sources of demand would kick-in (and these they would NOT offset).
Of course the Fed may be a multi-headed moron that doesn’t know what it wants…
– I think Dr Krugman believes B in the last bullet. I think Dr Sumner sees clearly the inefficiency in fiscal policy increases and wishes A in the last bullet were true.
12. January 2015 at 12:10
Here’s Stephanie Kelton wasting an hour of some undergrads’ Saturday morning last April;
https://www.youtube.com/watch?v=GkAKG6nkFM4
Don’t worry bothering to learn any economics, be happy; it’ll all come out in the wash?
12. January 2015 at 12:21
A year old gem on offset, from the archives:
http://www.themoneyillusion.com/?p=25914
Good comments too.
My favorite part is near the end where professor summer admits monetary offset only kinda exists but insists that it should, and we ought to keep acting as though it does until it comes back (like tinkerbell). That was the part that convinced me. I know it might seem like I’m being sarcastic, but I swear I mean it. Really great stuff!
12. January 2015 at 13:23
I am glad to see the macro econ bloggers engaging each other’s arguments more directly lately (Simon Wren-Lewis, Scott Sumner, Frances Coppola, etc.). It would be nice to strip out some of the partisan political speak, but at least I am seeing some of the issues that have bothered me addressed and signs that people are reading and responding to opposing views.
12. January 2015 at 13:42
As a short term Keynesian, the poorly designed programs of TARP and stimulus simply are good at stopping the bleeding and thus stopping the 1929 – 1932 Depression bottom. And the effectiveness the program rests on being fast, stabilizing and the private market animal instincts take over. (IN the US case the explosion of mining and energy.)
1) At looking at the US gov. debt has mostly improved tax receipts and less money going to wasteful foreign war. A lot of austerity was blowing less money on Iraq and Afghanistan had minimal effect on the US economy. So other US economy austerity is been relatively small and not large enough to effect anything.
2) If the recession was structural and cycle, I sided with structural but not in the normal sense. The main structural problem was the relative wages of the US compared to foreign workers, mostly Chindia, was too high. As Chinese and especially India wages catch up, I thought we would see on-shoring. (With China did not happened, where as India I have seen.)
3) Probably the main point for the job market in the Obama years, it was entirely of private jobs. I believe public jobs are still -500K and I don’t believe any post-war will have had negative public job growth. (Assuming public payrolls have only modest increases of ~100K.) I believe this payroll reality, will be “Only Obama could have let public payrolls fall so much.” (Only Nixon could go to China variation.)
12. January 2015 at 14:12
Re Collin’s point 3 on public/private jobs.
Austerity means different things to different people. However, if you are looking for the effect of government on the public in a recession, net hiring or layoffs by all government (local, state, and federal) has to be very important. Bill McBride at the blog Calculated Risk has a good plot of that.
http://www.calculatedriskblog.com/2015/01/public-and-private-sector-payroll-jobs.html
12. January 2015 at 14:28
Excellent blogging.
Print more money. Output could ride 10%, no sweat.
Output rose by 20% in the four years after the 1976 recession.
Why?
The Fed was growth-oriented.
12. January 2015 at 15:29
Hi Scott, I wouldn’t really call myself a Keynesian, but I thought I’d offer my own view on one of these questions and see if you agree.
Q: What is the proper measure of austerity?
A: For me, expectations matter a lot, for this reason it’s very difficult to measure the level of austerity as policy announcements and expectations of fiscal consolidation play a big part in affecting consumers decisions to spend. If it were possible, a proper measure of austerity would be the current fiscal deficit/surplus, plus a discounted inflation adjusted expectation of all future deficits/surpluses expected by consumers, relative to trend or some previous expectation. Does this sound reasonable?
12. January 2015 at 17:04
Another thing, where did SW-L get this idea:
“So the MM argument that the ZLB does not matter has to rely on Quantitative Easing (QE). Just how much QE do you do to offset any fiscal contraction? We have no real idea, because we have so little experience. Lags between policy actions and reactions are such that we cannot just say whatever it takes, because we might have lost a lot of output (or created a lot of inflation) before policy makers get it right. In reality, policy makers are likely to be cautious, so almost certainly they will not offset enough, even presuming that QE is capable of offsetting completely.”
How much do you need to cut interest rates when you’re above the ZLB to offset fiscal contraction?
12. January 2015 at 18:13
More problems with Keynesianism:
1. The multiplier doctrine and the marginal efficiency of capital (MEC) doctrine contradict each other. If there is an increase in net investment, then the multiplier doctrine predicts an increase in aggregate demand that is a multiple of the original net investment, which surely increases profitability, whereas the marginal efficiency of capital doctrine predicts a decline in profitability.
2. Keynes advanced the MEC doctrine as the barrier, so to speak, that prevents falling wage rates and prices from achieving full employment. In his explanation however, he assumed not a fall in wage rates and prices, but a rise in them.
12. January 2015 at 19:23
It’s embarrassing when a professor of economics has to resort to asking his audience for answers in his specialty.
“1. What is the proper measure of austerity?” – percentage of government spending to GDP
#2 – strawmen deleted
#3 – “Why claim that fiscal policy can be effective in the special case where a country is at the zero bound, and then claim that austerity caused the eurozone double-dip recession even though at the time the eurozone was not at the zero bound?” Huh? Apples and oranges.
#4- “When claiming that fiscal austerity reduced aggregate demand, why do Keynesians almost always provide data for RGDP growth, when NGDP growth is a much better proxy for AD?” – unless I’m missing something, RGDP is simply NGDP deflated. Trivial mathematical operation
#5 – Strawman. I doubt anybody is making this claim
#6 – “Why did Keynesians say that 2013 austerity in the US will be a test of market monetarism…” – they did not. This is a bald faced lie. Krugman said this initially but he’s not “Keynesians”. Austerity started in 2010, and indeed the US recovery is less now than in previous recessions when there is less austerity
#7 – “Why act like anti-Keynesians are bizarre heterodox economists,” [sic]. The rhetoric does not even make grammatical sense.
#8 – “I’d also love to know what Keynesians think of the Dems having a socialist as their lead member on the Senate Budget Committee, who then appoints a MMTer to be chief economist” – Sen. Bernie Sander is not that extreme. He was for example against the bailout.
Any other questions? You’re dismissed Prof. Sumner. I’ll be surprised if this makes it on your blog as I’ve been moderated in the past.
12. January 2015 at 19:29
foosion, Yes, they aren’t doing enough. They are currently biased toward tight money, but were not biased that way in 2006, and may not be in 2020.
Jason, Those are defensible points, but they don’t address the issues I raise. I thought Keynesians were trying to convince outsiders that their model is true. Just “assuming” no monetary offset isn’t going to convince anyone, that’s the case that needs to be established.
Jonathan, That’s true of post Keynesians, but when I say “Keynesian” I mean mainstream Keynesian—like in the EC101 textbooks.
Thanks Nick.
Jim, I’d love to see someone address any of the 7 questions here.
Britonomist, Yes, that sounds reasonable. Check out tomorrow’s Econlog post.
Rajat, I think it’s a mistake to view QE as the main tool. NGDPLT is the best tool. Then forward guidance.
12. January 2015 at 19:35
” I’d also love to know what Keynesians think of the Dems having a socialist as their lead member on the Senate Budget Committee, who then appoints a MMTer to be chief economist. And Krugman says the GOP relies on voodoo economics!”
So Keynesians have to explain and justify everything the Democrats do? How about Mankiw who calls himself a Keynesian and of course is Mr. GOP?
Maybe I’ll work on your question when Market Monetarists start explaining and justifying everything the GOP does. We could start with dynamic scoring.
12. January 2015 at 19:37
Ray, I’ve been waiting for my daily dose of humor, and you have not let me down:
“What is the proper measure of austerity?” – percentage of government spending to GDP”
Very funny. Do you know anything about fiscal policy? And almost as funny is your claim that there weren’t lots of Keynesians complaining about austerity in 2013.
At least your paranoia continues unabated.
12. January 2015 at 19:49
I could easily answer all other 6 stumpers-I basically answered number 7 in my answer above by questioning who all these Keynesians who used to be against UI are-so that leaves 5 more.
As my comments are not exactly well-received though maybe I’ll save the answers to 2-6 for Diary of a Republican Hater.
12. January 2015 at 19:51
Actually one of my comments seem not to have been published which is what the last one refers to.
12. January 2015 at 19:54
My point was that in question 1-and I don’t think any of these questions are stumpers-Keynesains are mischaracterized as they have believed since Keynes that tax increases as well as cuts in government purchases are cuts to GDP or ‘austerity.’
12. January 2015 at 21:42
Carola Binder links to this excellent Bank of Canada paper which studies the effectiveness of IT at stabilizing inflation when it is too low: http://www.bankofcanada.ca/2014/12/working-paper-2014-52/
12. January 2015 at 22:04
Austerity may mean that economy rolls back to its pre-industrial state and country finally has candidates willing to work in farming
12. January 2015 at 22:56
[…] is Scott Sumner with questions for Keynesians, all of them on the mark, read the whole […]
12. January 2015 at 23:04
“Update: I’d also love to know what Keynesians think of the Dems having a socialist as their lead member on the Senate Budget Committee, who then appoints a MMTer to be chief economist. And Krugman says the GOP relies on voodoo economics!”
dog whistle
noun
a subtly aimed political message which is intended for, and can only be understood by, a particular demographic group.
“dog-whistle issues such as immigration and crime”
Synonyms: fear mongering, red baiting.
Related: McCarthyism, Tea Party.
See also: yourself in the mirror.
13. January 2015 at 00:08
Please use the correct term. You are talking about adherents to Samuelson, not Keynes.
The neo-classical synthesis has failed as it always would. They got it wrong because they didn’t understand Keynes at all. The Krugmans and Simon Wren-Lewis of the world are just as much up a blind alley as the monetarists with which they share a common root.
“Heterodox economists reject economic orthodoxy not […] because they’re ignorant of what the orthodoxy is or because of some kind of halo effect, but because, when they look at the world through the lens of Marx, Kalecki, Sraffa, and Minsky, they see an economic and social system that continues to discipline and punish the vast majority of people in order to benefit a tiny minority at the top. They see, in other words, an economy that is inherently unstable, fundamentally unequal, and profoundly unjust.
Hence, heterodox economists see that another economics””another economic theory as well as another economic system””is both necessary and possible. Mainstream economists, for their part, don’t.”
https://anticap.wordpress.com/2015/01/12/mainstream-economics-heterodox-economics-and-the-left/
13. January 2015 at 01:21
[…] is Scott Sumner with questions for Keynesians, all of them on the mark, read the whole […]
13. January 2015 at 03:20
As a Keynsian, my answer to Scott’s first two questions are thus.
1. The answer is “both”. Is there any reason fiscal stimulus can’t come in two forms, first an increased deficit, and second, increased tax and public spending?
2. The reason Keynsians mix “countries that have their own independent monetary policy, with those that do not” is that they regard monetary offset as a flawed idea, thus the presence or absence of an “independent monetary policy” can be ignored.
The reason I personally regard monetary offset as flawed is as follows.
In circumstances where fiscal stimulus is applied (i.e. a recession) it’s likely the CB will agree that stimulus is needed, thus it WON’T offset fiscal stimulus. Doubtless there are cases where a CB has implemented “offset”. But to claim that CBs will ALWAYS offset is a very dubious claim.
13. January 2015 at 03:47
In circumstances where fiscal stimulus is applied (i.e. a recession) it’s likely the CB will agree that stimulus is needed
So let’s see – for some reason, the central bank decides to engineer a drop in NGDP, thus causing a recession – and at the same time, decides to go with attempts to cause inflation via deficit spending.
Nope, no contradiction there.
Welcome to the world of Keynesianism, where 1+1=potato.
13. January 2015 at 03:49
[…] Sumner: “ When claiming that fiscal austerity reduced aggregate demand, why do Keynesians almost always provide data for RGDP growth, when NGDP growth is a much better proxy for AD? NGDP is a direct test for AD shocks, whereas RGDP can be impacted by either AD or AS. RGDP doesn’t show AD changes, it shows aggregate quantity demanded. RGDP rose in the US between 1865-96, was that more AD, or more quantity demand as supply rose? […]
13. January 2015 at 04:06
In case I wasn’t clear enough, Keynesian theories require the central bank to act like a driver slamming the brake pedal while yelling “If somebody else presses the throttle, I’d gladly remove my foot from the brakes.”
13. January 2015 at 04:16
@Sumner – I dare you to explain, in simple words, what this means: “NGDP is a direct test for AD shocks, whereas RGDP can be impacted by either AD or AS. RGDP doesn’t show AD changes, it shows aggregate quantity demanded. ”
@Nick – I see you’ve not drunk the Kool-Aid entirely, that’s good. Searching the Sumner archives is indeed fun, like digging through a ziggurat in Mesopotamia–you never know what strange stuff you’ll find. Here’s a gem of obscurity: http://www.themoneyillusion.com/?p=24770
@collin – TARP did not really prevent a Great Depression, though it did stop some bleeding. C. Romer, a Keynesian and Obama econ adviser, says so, see: WHAT DO WE KNOW ABOUT THE EFFECTS OF FISCAL POLICY ? (2011 speech) (“By the first quarter of 2010, one year after passage [of TARP], output was 3% higher than it otherwise would have been”) 3% != end of the world collin.
13. January 2015 at 05:47
@JonathanH, excellent link.
13. January 2015 at 06:04
Ray,
This is a blog for people who understand economics.
Don’t you think it’s hypocritical that you write comments where you act like you have an understanding of monetary policy, and yet you can’t understand two sentences that any undergraduate student of economics would be able to understand? Two sentences even a motivated layman with Mankiw’s textbook could understand?
13. January 2015 at 06:13
Also Scott, to offset (joke intended) the nonsense, these recent posts have been as interesting and lucid as ever. Thanks for posting them. I’m looking forward to another year of your blogging.
13. January 2015 at 06:59
appoints a MMTer to be chief economist.
Deeply frightening.
13. January 2015 at 07:29
Mike, You said:
“Maybe I’ll work on your question when Market Monetarists start explaining and justifying everything the GOP does. We could start with dynamic scoring.”
I think you missed the point. I’m not a Republican.
You said:
“My point was that in question 1-and I don’t think any of these questions are stumpers-Keynesains are mischaracterized as they have believed since Keynes that tax increases as well as cuts in government purchases are cuts to GDP or ‘austerity.'”
I hope you see that this doesn’t even come close to answering my first question.
You said:
“who all these Keynesians who used to be against UI”
I never said Keynesians used to be against UI. I’m not against UI. But it’s good to know that you haven’t changed.
Thanks Saturos.
B.L. So now it’s “McCarthyism” to call a self-described socialist a “socialist?”
Neil, In the field of economics nothing is named after the right person, so why should Keynesianism be any different? In any case, Keynes was all over the map. In his writings you can find monetarist statements, pro-gold standard statements, IS-LM oriented ideas, protectionism, etc. Whatever you want you can find it somewhere in Keynes.
Ralph, Why are increased taxes considered stimulus?
Regarding your second idea, Krugman believes in monetary offset, just not at the zero bound. And why present graphs trying to persuade the rest of us to believe in Keynesian ideas, that have no value UNLESS YOU ALREADY ASSUME THE MODEL IS TRUE?
And I never claimed that monetary policymakers always offset fiscal stimulus. I’ve provided examples where they do not.
Ray, Draw an AS/AD curve. Then increase AS (shift AS to the right.) Notice that RGDP goes up even though there is no increase in AD. It’s EC101.
BTW, you are going to really like Mike Sax.
13. January 2015 at 07:30
Ray,
There’s no particular kool aid involved in following the arguments on this blog, exept maybe wage rigidity. You can take or leave things as you like, despite your persistent attempts to make it seem like there is some Grand Sceme being advanced here. Advocating for different targets or language to be use used inside the extant fed framework is pure technocratic incrementalism, not a radical agenda. Ask MF, I think he’ll agree–even though he hates that ivory tower BS.
And I was being serious before. Theres really a bunch of good suff in that old post, and it really shows off the nuances of prof summers position and issues with the way some prominent Keynesians are currently framing the debate.
13. January 2015 at 07:30
Thanks Ben.
13. January 2015 at 07:44
foosion,
The public doesn’t like inflation but likes higher NGDP, even if in practice they sometimes imply the same policy actions.
FTFY, in what was otherwise a salubrious sentiment. Although, tbh, I’m not sure the public at large has more that the tiniest glimmering of awareness of NGDP qua NGDP. They just notice their lives are getting better.
13. January 2015 at 07:48
…or worse, I suppose. I should have said people generally just notice their lives are getting better when NGDP grows smoothly on a trend of 4-5% per year.
Gee, maybe someone should target that, or something.
13. January 2015 at 09:15
Underneath the entire post is the belief that since the patient has not died not only has there been no austerity but said patient should run on back home now – never mind that the patient remains bed ridden and highly vulnerable to infections.
Must be nice to live in such a world.
13. January 2015 at 09:22
Bob, That’s an unusually egregious misreading. I certainly believe there was austerity in 2013. In any case, I’m willing to let Keynesians define austerity, I just wish they’d make up their minds.
13. January 2015 at 12:26
[…] I figured that I was just confused because I had not formally studied economics past my undergrad years, but apparently practicing economists are also confused. Here is Scott Sumner: […]
13. January 2015 at 15:56
@Sumner -no, sorry, a mere shift in the AS curve is not what reasonable people reading that passage conclude, including famous internet personalities and economists (See more at: http://marginalrevolution.com/marginalrevolution/2015/01/can-the-inflationary-erosion-of-g-lead-to-austerity.html#comment-158430792) You are the Jacques Derrida of economics.
@Nick–you are quite naive. Sumner is being very clever, like Derrida was, with goalpost shifting and selective arguments. To my astonishment however he insists on answering his critics. I would have thought he would withdraw like the French do and disable comments. Maybe when he gets more widely read at his new job.
13. January 2015 at 16:42
[…] – such as those in the Eurozone or those with hard currency pegs. Referring to this problem, Scott Sumner recently asked on his blog: “Why do Keynesians show cross-sectional graphs of fiscal austerity and growth, mixing in […]
13. January 2015 at 18:41
I’m not a “Keynesian” but let me take a crack:
1) “Austerity” is a group of decisions about taxes and spending designed to reduce the deficit during a recession notwithstanding that the normal expenditure rule is the invest in projects with positive net present values which normally would lead to increased public expenditures during recessions.
2) Dunno. Maybe because it is possible for both kind of countries to adopt austerity and they want to counter arguments that “austerity” promotes real growth.
3) Maybe because they assume a different reaction function of monetary authorities to changes in fiscal policy than you do. They probably did not assume that ECB was so committed to its mistaken policy that it would offset any stimulative fiscal policies. Different ceteris in their paribus
4) I guess because what they think is BAD about “austerity’s” decreasing aggregated demand during a recession (as they think it does) is that it decreases real growth.
5) “The transmission mechanism between AD and RGDP in the Keynesian model runs through jobs.” Not exclusively through jobs. From what I recall from macro back in the late ’60’s macroeconomists, mainly “Keynesians,” did not teach that labor was necessarily the only factor that is unemployed. Increased aggregate demand means that unemployed machines, buildings, land, patents, etc. also become more fully employed. As for reduce demand affecting output more than jobs (if it were within a firm), isn’t that called labor hoarding?
6) They mis-estimated the amount of monetary stimulus that the Fed would be able to produce?
7) a) Again, I don’t think “Keynesians” claim that monetary policy cannot conceivably be effective after hitting the ZLB, but that it is not likely to be in practice. [See Krugman’s “Not Invented Here Macro” criticism of Koo’s sola fiscal view. b) Maybe they would say the “standard textbook” recession does not require as large an adjustment in prices as the “Great Recession” has? c) I was not aware of any Keynesian claiming that the payroll tax cut was not expansionary. It sure was part of the fiscal “stimulus.” d) Could the effect of extended unemployment insurance on unemployment depend on just how bad the job market is? (Near full employment, insurance just allows the unemployed to be very choosy? At high unemployment insurance just postpones dropping out of the labor force? We didn’t cover that in my macro course.)
14. January 2015 at 07:13
Ray, You’d be surprised how many famous economists don’t understand S&D. Note how often we see “reasoning from a price change.”
Thomas, Thanks, but notice that many of your answers to to explain without really justifying these views. Nor do they explain the inconsistency in how Keynesians define austerity.
14. January 2015 at 09:10
If the Federal government decided tomorrow to cut the budget by 50% tomorrow, make no changes to tax rates, cut any unemployment benefits, and the FED keeps policy the same what would happen to NGDP?
14. January 2015 at 11:51
I am MMTer but MMT is only updated Keynes with knowledge of banking process/ accounting. (MMT is basicaly the description of banking accounting of fiat money system which no one else offers) Those accounting rules change over time, i hope everyone agrees with that. So if some change in banking accounting rules and established policy programs affect how Keynes is interpreted today comparing to rules that were at the Keynes time. Before Keynes there was no SS and unemployment insurance, no food stamps. Those are automatic stabilisers that changed the definition of austerity, deficit, effectivness of monetary policy, fiscal position etc..
The biggest change is also the change from Gold Standard to fiat money. That change fully and consequently arrived only after 1973.
I will atempt some answers to your questions.
1. Here is 4 questions. Deficit is halfway proper measure for measuring austerity. Automatic stabilisers change the trend of deficits, since they are automatic, they will raise deficits allready budgeted for next year. Public spending is not fixed even tough budgets are. They depend on private markets too, if private market fires people deficits will go up. Trying to force deficits down that are caused by actions of private sector is austerity. Tax increase is change from ax ante predicted spending path so it is austerity.
To mark the difference in deficits caused by automatic stabilisers and increased fiscal spending/stimulus you can call it purchases. This is attempt to communicate important distinction for inter Keynesian speakers, not for outsiders that are not aware of such distinction.
When talking to you SSumner, they will try to awoid using the term ‘purchases’ but not all will. So you might think that they coose the term as best aplicable ex post.
2.Most CBers admit one year delay of monetary policy actions to be felt fully and they have to act along expectations and predictions not base it on the past. In such case the fiscal policy is very effective while monetary is not in short run view. Private sector cuting investments is very quick while monetary policy is slow so you can discard efects of it while puting up charts only of fiscal actions of mixed systems.
Real answer is that monetary policy works only by squeezing the market, falling interest rate means that you relax that squeeze in order to keep economy going on ax ante path. And monetary policy is effective only above 2% since banks do not care about lower rate, they will not lower the interest rate for new credits even if bank rate keeps falling, Banks do not offer housing credits bellow 4% no matter CB interest rate. And everyone knows that economy is affected by monetary policy that works trough housing loans, not credit card issue. Loans for stocks is not affecting the real economy much.
14. January 2015 at 11:51
3. Did EZ use monetary policy to affect output? They kept it steady no matter what was going on in south. ECB followed the need of Germany not of south states.
Also the answer is in 2. the real answer.
4. Don’t know. “when NGDP growth is a much better proxy for AD” Prove it please. I think that you want them to use your models with wrong assumptions to explain it to you.
AD stagnates while AS grows and RGDP grows? then who bought all that output if AD did not grow? Foreigners. What is the benefit for domestic population of that? Nothing. And all the talk is about improving the condition of domestic population. Do you know that economics is about that? Or do you think that economics is all about GDP without improvements to population? What use are such assumptions then?
You actually assume that GDP represents improvement to population even tough that is not necesserily true. GDP can grow without any help to population. GDP grows while people starve, that’s possible you know and it is the case right now.
5.I do not know about a model, but real life shows where austerity can kill output without killing jobs; a)moderate cuts to welfare nets, just enough to cut subsidies not to put businesses under too much preassure to bankrupt. b)Cuts in welfare and at the same time employing into government jobs (security aparatus)under lower wage contracts. It is about balancing act that can not last for long.
6. Market monetarisam is tested all the times. Do you WANT to see it is the question. Or do you also find excuses to avoid seing the results?
7. I will guess that you are mixing neo and post-keynesians.
15. January 2015 at 09:22
Matt, It depends what you mean by “keep policy the same.” Keep interest rates the same? The money supply? NGDP expectations?
Jordan, MMT is not Keynesianism, this post was directed at Keynesians. I have no interest in MMT.
You said:
“To mark the difference in deficits caused by automatic stabilisers and increased fiscal spending/stimulus you can call it purchases.”
That makes no sense to me.