A quick follow-up on Keynesian economics

Tim Worstall has a new piece in Forbes:

Scott Sumner points us to this interesting proof that the Keynesian economic model must be true. For the Financial Times is crowing about the fact that when government spending rises then so does GDP. And when government spending falls, so does GDP. Thus, getting government to spend more increases GDP. Proof perfect that the Keynesian model works! Unfortunately there is a little flaw with this argument. That flaw being that right at the beginning, when we define GDP, we say that an increase in government spending increases GDP. It’s absolutely nothing at all to do with the Keynesian model, nor any other economy model: it’s an attribute of the way that we calculate GDP, nothing else.

Just to be clear, I believe that if it could be shown that an increase in G will lead to an increase in GDP, at least over any significant period of time, then it would prove the Keynesian model, at least to some extent. And there are a few cases where it is true, at least to some extent.  Tim is looking at an entirely separate issue, whether government spending actually has any value.  That’s a very important point, but I’m more interested in whether it creates jobs (which I doubt.)

In the post he links to I was making a different point.  I was amused that Jim Edwards pointed to a graph that refuted the conservative criticism of Keynesianism.  What did the graph show? It showed changes in government spending (as a share of GDP.)  It showed “delta G.”  And that was it.  It showed that when G changes, G changes.  Let me repeat that in case it went over your head.  It showed that when G changes, G changes.  That was the proof.  I thought that was really funny, but I guess it went right over the heads of some of my commenters. The post had nothing to do with the validity of the Keynesian model.



14 Responses to “A quick follow-up on Keynesian economics”

  1. Gravatar of Peter K. Peter K.
    29. November 2014 at 13:26

    I really wonder what’s going on here. Here’s a quote from the original Klein piece:

    “Until the middle of 2010, government spending supplemented private activity to boost total income. One can argue about whether any of this spending was actually valuable and whether or not it was worth the cost of financing it through taxation and borrowing “” we would ask the same questions about building and furnishing houses in the desert, too “” but the maths are straightforward.”

    Now Worstall and Sumner don’t agree with the graph and data from the BEA that government spending “supplemented private activity to boost total income?”

    The political question as Klein notes is it worth the cost. Likewise on the private side was it worth the cost for the financial and housing sector to create an epic housing bubble and financial panic? Markets aren’t perfect. Neither is government.

    I often argue with fellow liberals who like government spending and who are anti-war and insist that military spending is a waste and doesn’t add to GDP, jobs or income. Just seems like accounting identities and truisms to me.

    The question at the first level is whether or not there’s “crowding out.” Would the money being taxed be better invested in the private sector. The Keynesians are saying that in the current circumstances, no, when the economy is depressed, the government can borrow for cheap and the private sector can’t keep full full employment because of limited monetary policy. Seems like government spending would help achieve the targeted NGDP path level. Once we go over that, you get “crowding out” effects and inflation of the 1970s variety. But even in boom times you can have valuable government spending on projects which the private sector can’t handle.

  2. Gravatar of Peter K. Peter K.
    29. November 2014 at 13:33

    I just don’t understand what story conservatives tell themselves about what happened between the high unemployment of the Great Depression and the post-war creation of the middle class and consumer society. It’s was mostly government directed with a compliant monetary policy. During the Great Depression, private income levels didn’t amount to enough to maintain full employment let alone rising living standards. The post war years’ private income levels did allow full employment and rising living standards.

  3. Gravatar of ssumner ssumner
    29. November 2014 at 14:39

    Peter, For God’s sake it’s a joke!!! How can you not see that?

    I don’t know what else I can do, maybe another commenter can explain it.

  4. Gravatar of dtoh dtoh
    29. November 2014 at 19:09

    There are really two questions:

    1. Do we make better spending decisions collectively than we do individually?

    2. Is it ethical for 51% of the population to coerce 49% of the population to spend for the benefit of the 51%.

  5. Gravatar of Major.Freedom Major.Freedom
    29. November 2014 at 21:46

    “Jobs” is not a proper standard, because it is possible for people to perform wasteful labor. For example, it is possible for labor use up factor resources in the production of LOWER valued output resources. That is, capital consumption. This makes everyone poorer than they otherwise would have been had the labor been allocated differently.

    It isn’t the quantity of labor that matters, it is the quantity and quality of labor that matters.

    No, EMH does not mean you can ignore the effects that inflation has on the quality of labor.

  6. Gravatar of Kevin Donoghue Kevin Donoghue
    30. November 2014 at 03:02

    “The Keynesian model’s defining feature is that the multiplier is more than 1 in a recession.” — Tim Worstall in comments to his post.

    He really should get hold of an economics textbook. With even the simplest IS/LM model he would see why that statement is wrong. Indeed he doesn’t even understand basic microeconomics; he’s been known to assert that wages are determined by average productivity.

  7. Gravatar of Nick Rowe Nick Rowe
    30. November 2014 at 04:25

    Let the total number of animals A on an island equal the number of wolves W plus the number of sheep S.

    A = W + S

    Therefore, if we increase W, we increase A by the same amount. And we can measure the contribution of W to the growth in A by calculating delta W.

    It’s just as well we increased the number of wolves, to offset at least some of the effect of the dead sheep. But clearly we didn’t introduce enough wolves.

    (Good keynesian economists don’t argue like this from an accounting identity, of course. But those identities do have an enormous hold on our thinking.)

  8. Gravatar of Nick Rowe Nick Rowe
    30. November 2014 at 04:34

    Kevin: in Tim’s defence, maybe he had a horizontal LM curve in mind. (But the slope of the LM depends not just on elasticities, but on the feedback rule of the central bank.)

  9. Gravatar of Nick Nick
    30. November 2014 at 04:55

    The joke is too complicated … at first I thought ‘face / vase’ had it covered. Now I think the real joke is how hard it is to explain what the joke is. Or maybe how harsh any bit of criticism comes across over the Internet, even if its intended to be just poking fun.

  10. Gravatar of Joe Joe
    30. November 2014 at 05:13


    Can government spending on Basic Research create jobs? DOD/NIH spending comes to mind with the internet, and Cancer/Health research? These activities seem so risky, with an NPV that would make any modern corporation balk at undertaking the project (uncertain payoff, far in the future)so the government spending here has positive effects, but they are far off.


  11. Gravatar of ssumner ssumner
    30. November 2014 at 07:01

    Everyone, I think it’s even worse than most of you assume. The title of the article promised us a proof that a change in X affects Y. And the proof was “A change in X occurred”

    How is that not funny?

  12. Gravatar of am am
    30. November 2014 at 21:24

    The humour in your title was missed by many. Finally!

  13. Gravatar of Martin-2 Martin-2
    1. December 2014 at 07:40

    This is why you should always label your axes!

  14. Gravatar of ssumner ssumner
    1. December 2014 at 10:33

    Joe, Government spending can definitely create jobs in specific areas, the question is whether it leads to more total net jobs available.

    am, Did someone seriously think I was praising Keynesianism?

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