In major oversight, Robert apparently not invited to be guest contributor at The Economist
Mark Thoma recently linked to this post:
Scott Sumner meet Tyler Cowen
Between the two of you, you are three fourths of the way to understanding the main national accounts identity.
Let me refresh your memories Y = C+I+G+NX
Tyler Cowen mixed up the concepts of demand and supply when he argued that uncertainty causes low investment and that this is low aggregate supply (via Brad DeLong). In the medium term, but not the short term, low investment causes lower aggregate supply. Low investment, right now, means low aggregate demand, right now. This is the strange case considered by uh Keynes in the General Theory. Cowen argues that, if uncertainty is causing low investment, then fiscal stimulus will have a “marginal” effect. This is an unfortunate choice of words, as Cohen is also confusing levels and derivatives (that is level and marginal effect). Uncertainty implies low I and low Y for given G. It does not imply a low effect of G on Y.
Not to be outdone, Scott Sumner forgets that C, G, and NX contribute to aggregate demand and argues that a fiscal stimulus works only if people believe it will work (Via Paul Krugman and Mark Thoma). Evidently, he equates stimulating the economy with stimulating investment. It is possible he assumes that G crowds out C completely unless people believe the stimulus will work. This is, of course, nonsense. If people assume that they will pay the full increase in G with higher taxes (ignoring how the increase can partly pay for itself by increasing Y and tax revenues) then the stimulus will work unless the increase in G is permanent or G and C are perfect substitutes.
Behind the apparently diametrically opposite errors, there is a common perspective — the only thing that matters is private investment and therefore the confidence of businessmen.
The Economist is determined not to deprive its readers of this perspective inviting both of them as guest contributors.
Darn! All that time spent reading Woodford’s Interest and Prices, and the answer was right there in front of me if only I had known that Y = C + I + G + NX. Tyler “Cohen” might also want to stop thinking about real theories of the cycle, and go back to that good old national income accounting workhorse. There is no surer way to understand causality.
I suppose I should say something non-sarcastic, so I don’t slide completely into Brad DeLong territory. OK, here it is:
Please read my post before commenting.
PS, If The Economist has anymore room, they really should add a Canadian like Nick Rowe or Stephen Gordon.
Update 6/7/10: Several commenters said this post was in poor taste. I apologize if I was too catty. I had thought that he was obviously being humorous in his over-the-top criticisms of me, and assumed that if I returned serve he’d treat it like a joke. I know that he knows I understand Y = C+I+G+NX, and I know he isn’t as silly as I made him out to be. I’ll try to be more careful in the future. (BTW, I actually enjoy reading these goofy attacks on me. I tack DeLong’s over-the-top headlines about me onto my office door. We all get a good chuckle in the department.)
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6. June 2010 at 19:06
well, there goes your perfect game.
6. June 2010 at 19:46
I don’t trust anyone who keeps a running list of “the most honest ‘enemies’“, and crosses Tyler Cowen off. First, it’s very petty…and second, even if Tyler makes a mistake, he’s one of the most honest people I’ve ever had a chance to interact with.
6. June 2010 at 20:27
Friedman on related the issue of what Japan should have done.
“It went out of fashion to some extent, but I think it’s much too strong a statement to say that it’s out of fashion. It is no longer accepted in the academic community in its original, more rigid form. But in terms of the effect on policy, it’s still very strong. For example, Washington is currently advising Japan to get out of its trouble (and Japan is in deep trouble).
What is Washington’s advice? Fiscal stimulus; spend more; cut tax. It’s bad advice. Japan has introduced fiscal stimulus five times in the past seven or eight years and each time it’s been a failure and that’s not a surprise. Fiscal stimulus is not stimulating in and of itself, in my opinion. I think the Keynesian view is wrong on that issue. Fiscal stimulus has generally been accompanied by monetary expansion and then monetary expansion has been stimulating. However, in the Japanese experiments of the last five or seven years, fiscal stimulus has been accompanied by a restrictive monetary policy rather than an expansive monetary policy and the result has been that you’ve had continued recession or depression. If the Keynesian orthodoxy were out of fashion, Washington would be giving Japan very different advice. It would be saying to Japan: ‘Well, maybe it’s a good idea for you to cut taxes in order to increase incentives, but there is no need for the government to increase spending, that’s a bad thing to do. What you should do is encourage a more expansive monetary policy.’ So I think it’s much too strong to say that Keynesian orthodoxy is out of fashion.”
http://www.abc.net.au/money/vault/extras/extra5.htm
Scott and I seem to have a fundamental disagreement. I think the economy is suffering from a feeling that permanent income has declined, because of government taxes and regulation. I think the government should be following pro-growth policies. I also disagree that LBJ, who had the good fortune to implement anti-growth policies following a baby boom, with the US dominate on the world stage, and the growth that followed the civil rights movement (something I’m not sure has been studied. Isn’t a fair comparisons to what is currently going on, although the long term impacts will also be negative.
So to highlight Professor Friedman again, he said:
“Well, maybe it’s a good idea for you to cut taxes in order to increase incentives, but there is no need for the government to increase spending, that’s a bad thing to do. What you should do is encourage a more expansive monetary policy.’ So I think it’s much too strong to say that Keynesian orthodoxy is out of fashion.”
I think the government needs to increase incentives, in addition to an expansive monetary policy.
If Friedman were still alive, and he saw how much government had grown, he would argue for a two prong approach.
BTW I love to read Friedman’s stuff, which in contrast to Krugman is clear and compelling.
6. June 2010 at 20:29
Sorry, he begins by talking about Keynes “went out of fashion to some extent
6. June 2010 at 20:36
BTW Sorry, if you do read the Friedman link above it is amazing how well he anticipated the dangers of the Euro. In 1998 he clearly saw the dangers that Europe is now living with.
And again a clear contrast with Krugman
6. June 2010 at 22:06
I think this post was a bit rude (even if Waldman is being ridiculous), and I think people are less likely to engage you in a serious way if you get into sarcastic fights.
6. June 2010 at 23:57
Scott,
I actually think this post was in poor taste. I understand the desire to reply, but it’s probably best to avoid it. Now that you’ve been attacked by the Krugman-Thoma-DeLong side, there will be many more (ignorant) posts attacking you that one of the three will link to without comment. Mankiw has been dealing with this appropriately by simply ignoring it in his usual pithy manner.
I can’t stand to read those three above (Krugman-Thoma-DeLong) regularly because of the spates of petty attacks they make, or when they imply their opponents are ignorant or evil. After a bit I feel silly for not reading such intelligent men, and quickly rediscover those reasons all over again.
If there is a well thought out argument made, it is well worth your effort to point out the differences and where you’re correct.
I also think you’ve done a good job in the past, pointing out where you agree and disagree. The Krugman back-and-forth seemed like the first time there was difficulty over this, because of the way Krugman implies conclusions without stating them.
But please don’t do this kind of thing again. I’d like to keep you in my RSS reader.
7. June 2010 at 01:25
Is this Robert really someone you should worry about? His is the kind of criticism that shows you that you are being taken very seriously now, so think of it as a compliment.
7. June 2010 at 02:25
I don’t mind you slipping off the high road once in a while, honestly, but this guy does seem like too much of a petty jerk to bother with. Tyler Cowen a dishonest conservative? That’s a dead giveaway.
7. June 2010 at 03:27
It’s a good thing you kept your reply to a minimum. Waldmann is not a very interesting economic blogger. I am surprised Thoma linked to his post.
7. June 2010 at 04:00
Robert misunderstood Tyler’s post. I had exactly the same misunderstanding as Robert, when I first read Tyler’s post. I thought Tyler had muddled AS and AD. Only after I had read through the (very difficult) paper (by Pindyck?) linked to in Tyler’s (second?) post, did I see what Tyler was saying.
Robert misunderstood your post. So did a lot of people. I had to read it twice to get what you were saying, and I am more familiar with how you think (especially, in this case, how you think of “monetary policy” – that monetary policy sets expected NGDP, not nominal interest rates) than those who misunderstood you.
Stuff happens, as they say.
Thanks for recommending me to the Economist! I don’t think I’m up to the task though. They need people, like you, who can articulate a clear, consistent vision.
7. June 2010 at 05:52
rob, It’s not my fault! The ref made a bad call.
Niklas, I agree. Has Tyler ever done a post as catty is this one? I’ve never seen it.
DanC; You said;
“Scott and I seem to have a fundamental disagreement. I think the economy is suffering from a feeling that permanent income has declined, because of government taxes and regulation. I think the government should be following pro-growth policies. I also disagree that LBJ, who had the good fortune to implement anti-growth policies following a baby boom, with the US dominate on the world stage, and the growth that followed the civil rights movement (something I’m not sure has been studied. Isn’t a fair comparisons to what is currently going on, although the long term impacts will also be negative.”
I actually agree that the trend growth rate has likely slowed due to bad policy. But I don’t see why that should lead to higher unemployment. If anything, people should work harder.
In fairness to Krugman, I think he also worried about the euro.
jsalvatier, Sorry if it seemed rude. I assumed people would treat it as a light-hearted joke, as it merely returned serve. I agree that if I wrote something like this out of the blue it would have been rude, but I just responded in kind. I think he knows that I am aware of Y=C+I+G, and I know that he isn’t as silly as I made him out to be. I assumed he would laugh on reading my post. If not, he really shouldn’t be writing the sort of post he did, as people might think he was serious. In any case, I won’t do it again since my fans don’t like it.
Sean, I’ve had problems with Krugman from the very beginning. He misrepresented my views in his very first response.
As I said above, I won’t do these again, since my fans don’t like them. I thought people would read it as silly, I’m really surprised it came off as mean.
woupiestek, No, I am not worried about him. I thought people would read the post as being funny. I guess not.
Sean Abbott, Thanks for the advice, I’ll try to stay on the high road.
gappy, I was surprised too. Thoma recently said he assumed Mankiw must agree with a Robert Samuelson post, as Mankiw linked to it w/o comment. Surely Thoma didn’t agree with the Robert post?
Nick, Thanks. By the way, his misunderstanding would not have led me to do a sarcastic post. I was responding to his comment about The Economist bringing on board a bozo like me. I figured anyone who writes that way wouldn’t mind getting a little back.
Your last paragraph is too polite, as is clear from your second paragraph.
7. June 2010 at 06:00
I added an update, with a mea culpa.
7. June 2010 at 06:44
I guess I have always had a blind spot about nasty posts. In general I think thinks read nastier in posts then they sound in your head.
I think the expected drop is in expected investment income leads to less investment and fewer jobs.
As employment increases in the private sector declines and public sector employment increases, the overall productivity of the society declines, especially as redistribution becomes the primary goal.
Plus I view the increased taxes and regulations as an increase in the costs of production which shifts the short run AS to the left (as well as shifting LRAS to the left because potential output has decreased.)
7. June 2010 at 06:45
sorry, I think “things” read nastier in posts then they sound in your head
7. June 2010 at 06:52
[…] a fairly vicious back-and-forth (starting here and ending here), I’ve been inspired to think a bit harder about stimulus targeting as it relates to growth […]
7. June 2010 at 07:54
“I added an update, with a mea culpa.”
The post wasn’t really that bad.
7. June 2010 at 12:35
If you intended to mock the almost fixation with Y = C + I + G + NX that some economists seem to have, I think you did so with good reason.
My feeling is that thinking too much in terms of that equation won’t help you notice the big turns in the economy until afterwards. Although an equation doesn’t necessarily imply causality it very easily makes you think in these terms anyway. And it’s usually G economists end up wanting to boost.
I wonder what it would take for Paul Krugman to reject the fiscal stimulus idea. Having suggested a much bigger stimulus I think he will find support for the fiscal boost whatever the economy does. If it recovers it just shows how effective it is – if not it should have been bigger.
7. June 2010 at 17:22
Gosh, but some of your commenters are sensitive souls.
Honestly Scott, I didn’t think your post was in poor taste at all, although it may have been misplaced effort on your part. Some flies are not worth swatting.
I am not sure what part was considered to be in poor taste – the vast majority of it was a quote from another blogger’s post. Perhaps it was the title? If so, lighten up people! Fun is still allowed isn’t it? Particularly in response to rather dreary and ridiculous gotcha-type sniping from one’s intellectual adversaries.
Personally, I thought the title was the best part. The rest of your very short post was humourous and gently sarcastic but far too mild to be in poor taste. Nothing wrong with a little good-natured horseplay, it seems to me, even in the typically gentlemanly and well-intentioned (with certain notable exceptions) intellectual debate that characterizes econbloggers.
More seriously, all of us who read your blog have benefited enormously (and at zero cost) from the huge efforts you devoted to your posts over the last year or so. Even if we disagree with you, your posts have been thought-provoking and substantive. You have been unfailingly fair and earnest in dealing with your intellectual opponents. You have been generous in the extreme with commenters, responding to almost every comment. The notion that you owe your readers adherence to some sort of playground-style zero tolerance moral standard strikes me as rather presumptuous and distinctly lacking in gratitude. Given what you have put into this blog and what we have gained from it, I, for one, think your readers should be prepared to grant you lots of slack. In any case, it’s your blog, not theirs.
7. June 2010 at 20:20
On Waldman and Cowen:
http://rjwaldmann.blogspot.com/2010/06/roberts-list-of-reasonable-and_08.html
8. June 2010 at 12:36
DanC, I agree. I guess I’ve always thought it’s meaner to say “you’re a big fat idiot” than to say “you too” when someone calls you a big fat idiot. I saw my post as a “you too.”
By the way, I’m sure Robert is a great guy, these things happen in blogging.
Tom, I agree.
Mattias, Here’s the way I look at it. He made fun of The Economist for picking a bozo like me, so I made fun of him not being picked. He made fun of me not know the Y=C+I+G equation, so I made fun of him thinking it proved anything. So I figure we’re equal. 🙂
David, Thanks, and as I said I would never do that sort of sarcasm except in response.
Mark, I think that’s an excellent list. I didn’t know Robert was Waldmann. I need to get out more.
If you read this, I have a new post that tries to better explain my convoluted theory of expectations traps.