What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.—Adam Smith, The Wealth of Nations
Here’s some nonsense on stilts:
Richard Feynman was once asked what he would pass on if the whole edifice of modern scientific knowledge had been lost, and all he could give to posterity was a single sentence. What axiom would convey the maximum amount of scientific information in the fewest possible words? His candidate was ‘all things are made of atoms.’ In a similar spirit, if the whole ramshackle structure of contemporary macroeconomics vanished into thin air and the field had to be reconstructed from scratch, the sentence which packs as much of the discipline into the fewest possible words might be ‘governments are not households.’ The principles of running an economy are in many crucial respects different from those of keeping your own finances in order. The example of the hypothetical tenner is part of the reason why: governments need to keep money moving around. For a household, to deposit the money in a savings account might well be the most sensible course. Governments, on the other hand, need that velocity – they need GDP. In order to get it, they sometimes have to borrow that first tenner, which they can do in a range of ways not available to ordinary citizens (who can’t, for example, just print the money). Once that first tenner is spent, the government’s hope is that it will continue to be spent many more times. [Emphasis added.]
The fundamental fallacy of Keynesian economic analysis is that it is predicated on the notion that the rules of fiscal common sense do not apply to the government. Contra Smith, the Keynesians assume that the government need not live within its means, and that it focus on attaining certain target numbers for highly abstract, generally unrealistic abstract notions of economic productivity.
The shallowness of the Keynesian worldview is apparent in many ways:
First, the Keynesian emphasis on monetary velocity is extraordinarily shallow. It is assumed that government spending increases monetary velocity by spreading money throughout the economy. Even if this assertion is true, what is often neglected is how, at least in regards to taxation and borrowing, the only way the government spreads money throughout the economy is by first taking money from the economy (of course, this is not technically the case with inflation, but since governments do not fund their budgetary expenditures solely by inflation, one must necessarily conclude that governments at least partially fund their expenses by either debt, taxes, or some combination of the two, which requires the further conclusion that, at some point, money must first be taken from the economy to later be put in to the economy). Another observation that is often neglected is that money that is not spent by the government (i.e. privately-spent money) also has some degree of velocity as well. Money does not generally sit stagnant, except among those who wish to store currency under their mattress or such-like, and so money that is spent my non-government market actors has the same velocity as money spent by government market actors, assuming that in both cases, no currency is ever removed from circulation. Thus, the assertion that government policy must needs be different from household economic policy is fallacious because the justification for the assertion that government policy is special is itself specious.
Second, Keynesians neglect to understand that money is not itself production. As was noted in the excerpted piece, households cannot print money whereas the government can. Unfortunately, the mere printing of money does not itself magically cause more products to appear in the economy. Now, inflation can draw demand forward, but only to a limited extent, because ultimately shifting production forward runs into the very serious problem of running out of demand, production materials, or both. One of the reasons why the housing market collapsed in 2008 was due in part to demand exhausting itself. To put it simply, people stopped wanting houses at the prices provided. Sure, the housing supply is at its highest, but now the demand for houses has declined, which is why housing prices remain relatively depressed. Quite simply, demand is not infinite—neither is production—which is why inflation will always fail to permanently increase production. There are limits to everything, and inflating the currency does not change that very simple fact.
Third, Keynesians fail to realize the scalability of hierarchy. The reason why the government is often compared to a household is because the household is a useful metaphor for understanding hierarchy. Every household has a head, every household has expenses, every household has members, and so on. A functioning household is one where everyone contributes to its upkeep, and one that lives within its means, and so on. Of course, the metaphor is not exactly perfect, but it is generally useful, and so it serves as a useful point of comparison, and provides people with simple heuristics for evaluating, say, the long-term reliability and stability of any hierarchical organization, such as a business, charity, church, or government. If a functioning family is one that minimizes deadweight and free riders through the proper division of labor, and manages to avoid fiscal problems by living within its means, then it is generally reasonable to expect that a state or business that minimizes deadweight and free riders, and also lives within its means, well do reasonably well and be expected to have a lot of stability.
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And so, while governments are not households, the difference is more along the lines of scale than quality. Governments are similar enough in form to households that the microeconomic analysis used to evaluate the fiscal health and stability of a household should be a useful heuristic for evaluating the fiscal health and stability of a government. Furthermore, the form of government is not so radically different from the form of households that it justifies a radically different set of analysis and evaluation.
Foseti provides one for “austerity”:
I’ve complained a few times that opponents of austerity refuse to define what they’re opposed to.
Naively, I’d assumed that austerity meant that governments were cutting spending. Actually, it turns out governments continue to spend more money during period of austerity and even periods of “crippling austerity.”
I’ve done some investigation and I now believe I can define “austerity.” Here goes:
Austerity is when more than half of a country’s working age population has to . . . wait for it . . . seriously, I hope you’re sitting down for this . . . go to work at an actual job every day.*
One way to tell that Krugman et al are big-government socialist shills is simply by noting that they use the word “austerity” in a rather vague manner to refer to countries that are apparently not Keynesian enough in their approach to dealing with the current economic crisis. Basically, Krugman’s version of austerity is not spending cuts or tax increases, but rather deficit spending that doesn’t incur a large enough deficit. I don’t see how this is austerity as much as a milder form of irresponsibility, but then I’ve never won any prizes in economics, let alone one in honor of Alfred Nobel. So what do I know about austerity?
So Japan, which is spending heavily for post-tsunami reconstruction, is growing quite fast, while Italy, which is imposing austerity measures, is shrinking almost equally fast.
There seems to be some kind of lesson here about macroeconomics, but I can’t quite put my finger on it …
Krugman is, of course, referring to that well-known macroeconomic principle known as the “you-will-become-ridiculously-wealthy-if-you-dump-your-capital-in-the-ocean” principle. It’s a close cousin to the “become-ridiculously-wealthy-by-burning-your-capital-to-the-ground” principle, which actually the basis of modern financial planning, wherein investors are encouraged to buy houses and land, then render them uninhabitable by completely scorching them, which then leads to wealth untold.
Oh wait; it doesn’t. In fact, increased GDP growth is not a good thing unto itself, especially if the growth comes on the heels of replacing destroyed capital (though it should go without saying that, ceteris parabis, it’s better to experience GDP growth in the aftermath of capital destruction than to experience non-growth or shrinkage). Quite simply, it is always a net negative to have capital destroyed, and that the destruction of capital is indicative of a net loss of wealth. Thus, replacing what was lost, while good for GDP growth, is a contra-indicator that simply implies that a great loss has taken place.
Krugman once again shows himself to be a complete idiot, and wholly undeserving of the Nobel prize in economics. The broken window fallacy was debunked over 160 years ago, and yet Krugman has apparently never read it (which means he’s ignorant) or it means that his allegedly superior intellect is simply too undeveloped to draw the same conclusion on its own (which means that Krugman is stupid). Either way, Krugman is not to be trusted for advice or analysis.
It is astounding how significantly one idea can shape a society and its policies. Consider this one.
If taxes on the rich go up, job creation will go down.
This idea is an article of faith for republicans and seldom challenged by democrats and has shaped much of today’s economic landscape.
Another reason this idea is so wrong-headed is that there can never be enough superrich Americans to power a great economy. The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the median American, but we don’t buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, we go out to eat with friends and family only occasionally.
I can’t buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can’t buy any new clothes or cars or enjoy any meals out. Or to make up for the decreasing consumption of the vast majority of American families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages.
We’ve had it backward for the last 30 years. Rich businesspeople like me don’t create jobs. Rather they are a consequence of an eco-systemic feedback loop animated by middle-class consumers, and when they thrive, businesses grow and hire, and owners profit. That’s why taxing the rich to pay for investments that benefit all is a great deal for both the middle class and the rich.
This was supposed to be a TED talk but, fortunately, the people who run those things aren’t complete idiots and are capable of prolonged rational abstract thought. However, it’s obvious from the excerpts that Hanauer completely out of his league when it comes to economics.
[Aside: before I begin explaining why Hanauer is talking out of his rectum, let me first state that I have no interest in defending the rich per se. Some rich people are terrible, like the banksters of the Fed and Wall Street that defrauded the citizens of the united states out of hundreds of billions of dollars, and some rich people are awesome, like the all the VCs and Angel investors that help to fund the start-ups of hundreds of new businesses. Like all groups of people, there are some complete turds, some good role models, and a decent amount of mediocrity.]
Hanauer is completely out of his league because he focuses solely on consumption as the key to wealth. I’ve addressed this in passing before
, but now seems like an appropriate time to pick up on the point again:
consumption is not wealth-creating, it is wealth-consuming.
In fact, that is the definition of the term.
Short-term consumption does an especially good job of illustrating this point.
If one day I bake a cake and the next day I eat it, what do I have on net?
Yes, I created a cake, but I also consumed it as well, and therefore I have nothing to show for my efforts, save for some temporal feelings of being full and tasting something sweet.
And feelings, being dynamic and unquantifiable, are not exactly the stuff of wealth.
For proof, go to a bank and try to take out a loan by using future emotions as collateral.
Real wealth, in contrast, is not consumption but rather accumulation. It is worth pointing out that accumulating wealth does not preclude its usage (think of real estate, for example). In this case, things are produced and/or cultivated, but they are not immediately consumed. This is generally referred to as capital accumulation or capital formation.
Now, Hanauer’s analysis fails because it fails to account for the role of capital in production. You can’t produce anything unless you have materials for production, people and/or machines for production, and a place to actually produce things. And you can’t consume stuff unless you produce it first. These elementary observations are apparently too complex for Hanauer to consider, which is why he claims that the wealthy don’t create jobs.
In a tautological sense, this is true simply because the wealthy don’t often consume more than the poor (although it does beg the question of who buys luxury cars and yachts, but that’s somewhat beside the point). In a technical sense, this can be true as well, as not all wealthy people are directly responsible for the creation of jobs. However, since production—and its attendant jobs—are generally contingent on either having capital or having access to capital, it should be obvious that the rich are necessary for job creation if for no other reason than the simple fact that they have capital that can be used for job creation.
In a technical sense, it is not necessary for capital to be held by the wealthy, seeing as how anyone can technically have capital. However, it is the rich that, by definition have the capital. And since capital is necessary for production and thus, according Hanauer’s erroneous assertion, wealth, it stands to reason that there must somewhere be the accumulation of capital. And those who accumulate capital are the wealthy.
Thus, the wealthy are necessary for job creation, if for no other reason than by virtue of the fact that they have capital. Thus, taxing the rich, particularly taxes on their capital, means that that there will be fewer jobs because there will be less capital with which to enable production.
The second problematic assertion that Hanauer makes is that the government is better or more efficient at managing capital than the wealthy. This is predicated on two assumptions. First, Hanauer assumes that the wealthy simply sit on their capital. Second, Hanauer assumes that the government is generally more efficient than motivated investors at allocating capital.
The former assumption is easily dispensed with as Hanauer himself notes (chase the link to find it) that the wealthy have become wealthier. While a good portion of this is more than likely due to defrauding taxpayers, as was seen in the housing banking crisis of 2008, it is hard to deny that wealthy people generally make a point of increasing their wealth by a mechanism known as investing. Investing is basically people letting other people use their capital in exchange for money. Thus, the wealthy are allowing their capital to be used productively instead of merely sitting on it.
The latter assumption is a little more difficult to address, but it is worth noting that the government has created a ton of messes when it gets involved with capital allocation.
Pretty much every bubble in the central banking era is proof of this.
Anyhow, the assertion that the government is generally
superior at allocating capital is provably false (see the footnote to this post
for further evidence).
Thus, when all is considered, Hanauer’s argument is nothing more than Keynesian nonsense, as evidenced by its single-minded focus on consumption as the driver of wealth. It predicated on fallacious assumptions, it ignores basic economic principles, and is nothing more than shallow demagoguery. Incidentally, much like Krugman’s economic “analysis,” this is yet another example of the narrowness and short-sightedness of Keynesian analysis. There is no depth to it, for it focuses on one variable, as if one aspect of the market holds the key to explaining it all. Basically, Keynesians are like children with the way they think, since they cannot apparently consider multiples variable simultaneously, or even guard against common fallacies and short-sightedness.
Finally, note that this analysis, like most other examples of Keynesian analysis, calls for increased government intervention and control. Isn’t it about time we acknowledge that Keynesianism is nothing more than an attempt to justify socialism using capitalistic rhetoric?
It doesn’t get much clearer than this
The first case—Obama triumphant—obviously makes it easiest to imagine America doing what it takes to restore full employment. In effect, the Obama administration would get an opportunity at a do-over, taking the strong steps it failed to take in 2009. Since Obama is unlikely to have a filibuster-proof majority in the Senate, taking these strong steps would require making use of reconciliation, the procedure that the Democrats used to pass health care reform and that Bush used to pass both of his tax cuts. So be it. If nervous advisers warn about the political fallout, Obama should remember the hard-learned lesson of his first term: the best economic strategy from a political point of view is the one that delivers tangible progress.
A Romney victory would naturally create a very different situation; if Romney adhered to Republican orthodoxy, he would of course reject any government action along the lines I’ve advocated. It’s not clear, however, whether Romney believes any of the things he is currently saying. His two chief economic advisers, Harvard’s N. Gregory Mankiw and Columbia’s Glenn Hubbard, are committed Republicans but also quite Keynesian in their views about macroeconomics. Indeed, early in the crisis Mankiw argued for a sharp rise in the Fed’s target for inflation, a proposal that was and is anathema to most of his party. His proposal caused the predictable uproar, and he went silent on the issue. But we can at least hope that Romney’s inner circle holds views that are much more realistic than anything the candidate says in his speeches, and that once in office he would rip off his mask, revealing his true pragmatic, Keynesian nature.
We have, to roughly quote Vox Day, a bi-factional ruling party, wherein the only difference between the factions is that one wants huge government and the other one wants giant government. That is, the difference is a matter of degree, not kind. Both sides are Keynesians, both sides will continue to extend and pretend until the system collapses, both sides are anti-liberty, both sides will ignore the constitution, both sides are corrupt, both sides will be ineffectual. There is no difference between the two “sides.” They are simply sideshows meant to distract the easily-fooled masses, and thus cause them to ignore the fact that democracy is dead. This false sense of choice causes the masses to spend their time and energy picking sides, which is a perniciously clever way of reinforcing support for a statist system. Basically, everyone who gets caught up in politics gets so caught up in supporting certain parties that they don’t even realize that by the mere act of voting they are simply casting a vote for bigger government and a more intrusive state. The silly fools think their votes matter.
Furthermore, I see no point in voting in this election if Romney wins the GOP nomination, because it’s not like there is actually going to be a difference Romney and Obama. They are one and the same, albeit with different skin colors. They are both statists with strong desires for power. They lack the humility to see that they (and, by extension, government) cannot fix the problems currently facing the nations. They both have a pretense of knowledge, and voting for one is no different than voting for the other. The only way to have real choice in this election is for Ron Paul to get the nomination. But if there were a real choice, how could the bi-factional ruling party stay in power?
Businesses aren’t investing in the United States because of a lack of consumer demand, International Paper CEO John Faraci said Friday.
“I think this was all about consumer spending and demand. You know, the problem we have is there’s inadequate demand to create jobs. We know how to respond when there is demand,” he said on CNBC’s “The Kudlow Report.”
The U.S. Commerce Department estimated that gross domestic product expanded at a 2.2 percent annual rate in the first quarter, falling short of analysts’ expectations it would grow 2.5 percent and slowing down from the fourth quarter’s 3-percent rate.
The more correct way of saying this is that there is a lack of consumer demand for products at profitable prices. There is plenty of demand for cheap goods (for example, imagine what would happen to iPad sales if the price dropped to $150 each). The problem is that cheap goods often have very thin profit margins.
Also overlooked in this admittedly shallow Keynesian market analysis is that purchasing power has declined. It’s not that demand has disappeared or necessarily reduced (who doesn’t want stuff?); it’s that people don’t have the ability to act on their demand. Put plainly, people don’t have money, regardless of whether we’re talking cash or credit.
Thus, saying that demand has declined is a rather shallow way of addressing the problem and thus begs a shallow solution (quantitative easing, e.g.). The deeper issue is that people’s real income has declined, alongside their ability or willingness to use credit to purchase things. Therefore, the proper solution is not a short-term stimulation of demand, but rather an attempt to fix the structural flaws that have caused a decline in real income. The causes for such a decline are various: free labor, inflation, free trade, and so on. Fixing these things won’t be easy—in fact, they’ll be quite painful in the short-term—but they will lead to a long-term fix. Unlike a stimulus.
It’s counterintuitive that falling prices can be bad. After all, nobody ever complained about stuff being cheaper. The problems, though, are twofold. First, if prices fall across the board, so too will wages — but debts won’t. Borrowers will have a harder time making their payments. More of them will default. And defaults will push down prices and wages even more. This so-called debt deflation is basically a doomsday machine for mass bankruptcy — and it’s exactly what happened in the 1930s. The other way of thinking about why deflation is so toxic is that it effectively increases interest rates just when we want to reduce them. What matters for borrowers is the real interest rate: that is, the interest rate minus inflation. But falling prices mean inflation is negative, so real interest rates go up. Again, bad for borrowers.
Actually, falling prices aren’t bad at all, especially if they are coming down after having been artificially inflated. This is how the market clears itself. Will some get hurt by this? Yes, especially those who foolishly bet on the bubble expanding indefinitely. But this was always a bad bet from the beginning; declining nominal prices merely reveal this fact.
Now, it is generally true that lower prices will lead to lower wages, all things being equal. But, as long as there are generally efficiency gains in labor, the rate of decline in regards to the price of goods should be greater than the decline in regards to the cost of labor. As long as production efficiency is realized in some way, declining wages should not be a problem because they generally will not decline as much as product prices. Caveat: this analysis is predicated on the assumption that there is no expansion in the money supply. Monetary inflation complicates analysis considerably, at least in terms of nominal price, but does not invalidate the fundamental point.
That debts won’t deflate is theoretical nonsense. In the aggregate, debt will most certainly deflate because a certain number of people will inevitably default on their loans. Others may settle their loans in lieu of default. The practical outcome is that deflation will hit debt. And those that get hit the worst by deflation will be those who most encouraged the bubble by loaning to those who caused it.
The conclusion that this will lead to some sort of doomsday scenario is absurd on its face, for it is obvious that aggregate demand will never be zero. Humans always want something, and they will pay to get what they can. And so, while it is most certainly true that practical aggregate demand will decline considerably in the wake of deflation, it is simply farcical to even suggest that aggregate demand will go to zero, or even be cut in half.
Ultimately, deflation is the markets way of cleansing itself, allowing misallocated resource to be used more effectively. Once the market begins to clear, prices rise again until there is once again an optimal mix of resource usage. Trying to prevent nominal deflation from occurring only encourages the continued misallocation of resources, and makes the inevitable pain worse, while also allowing for the possibility of rampant inflation. Thus, preventing deflation is nothing more than a lose-lose proposition, and a fool’s errand to boot.
Simon Wren Lewis who is a professor of economics at Oxford University has an interesting piece (hat tip: Mark Thoma) on the distinction and choice between micro founded macroeconomic models and top-down models such as the IS/LM (Keynesian) or other variants such as Modern Monetary Theory (MMT).
I think this is an interesting discussion and I have penned my own thoughts on microfoundations in macroeconomics here. Mr Lewis is balanced but seems to be on Paul Krugman’s side (by and large) who has been devastating in his critique of modern macroeconomics especially in the wake of the financial crisis.
For good order, my own views are summarized in the following snippet.
Two obvious questions impose themselves at this point. One is whether the use of representative agents in macroeconomics has something, in general, to do with the recent soul searching among macroeconomists and the critique against the profession. And the second is whether the study of macroeconomics and demographics in particular calls for the non-use of representative agent modelling.
On the first I don’t necessarily think that it exists to the detriment of macroeconomics as a discipline, but I do think that a couple of points need mention. First of all I will echo the point made in Hartley (1997) that given the widespread use of representative agent modelling in almost all corners of macroeconomics and the almost religious devotion to it in graduate and PhD economics I think it is highly problematic that we have not had a more serious debate of its methodological merits. I would emphasize this in particular in the context of the fact that the use of representative agents leads to very inflexible (although rigorous) mathematical models and the blind faith in these models tend to steer macroeconomics onto a very narrow methodological path. During my research and initial ground work for the thesis I actually did write my own representative agent model to suit my specific agenda, but found in the end that I was paying more tribute to the laws of calculus than the connection between ageing and capital flows/open economy dynamics and as I set up the problem I ended up very close to the original benchmark problem.
It is interesting in this respect that Mr. Lewis spends quite a bit of time to come up with a name for what he calls the alternative to traditionally micro founded general equilibrium models (in either dynamic or static form). It seems that despite the fact that such “ad-hoc” models have been around for a long time, we have been able to come up with a name for them. Here is Mr Lewis.
The issue I want to discuss now is very specific. What is the role of the ‘useful models’ that Blanchard and Fischer discuss in chapter 10? Can Krugman’s claim that they can be more useful than micro founded models ever be true? I will try to suggest that it could be, even if we accept the proposition (which I would not) that the micro foundations approach is the only valid way of doing macroeconomics. If you think this sounds like a contradiction in terms, read on. The justification I propose for useful models is not the only (and may not be the best) justification for them, but it is perhaps the one that is most easily seen from a micro foundations perspective.
For those un-initiated in the taxonomy of modern economic teaching this will seem odd. But it isn’t.
I would venture the claim then that the general Keynesian framework of IS/LM (or “curve shifting” models in general) is still seen as an undergraduate tool or a tool for business students with little or no foundation in mathematics. If this is the informed view of the economics profession as a whole (which I think it is) then there is certainly no need to elevate such models to the honour of being alternatives to conducting real and serious micro founded macroeconomics. At this point, the sarcasm is obvious I hope.
The general equilibrium framework in its dynamic form with dynamic programming problems and sophisticated econometric methodology to estimate the optimized equations is largely outside the scope for most people. As a result, the ivory tower in which many (if not most) academic economists do their research serves as an incubator for skepticism (even pity) towards those who might have the audacity to argue that what they are doing is wrong. Indeed, I would argue that despite signs that a genuine critique towards micro- and pure mathematical founded economics has emerged, the general trend is still one of “physics envy” in economics.
Hence, the debate for and against micro founded models very quickly turns into a discussion between those who do not understand the language of modern macroeconomics and those who do. Obviously, in Mr Lewis’ case this is not the case. Indeed, the financial crisis seems to have given birth to a growing critique from within the macroeconomic research community towards blind reliance on the micro founded framework. Krugman’s piece from 2009 (linked above) is already a classic example of the anti-thesis, but there have been others.
Buiter had a go in relation to monetary economics back in 2009;
Charles Goodhart, who was fortunate enough not to encounter complete markets macroeconomics and monetary economics during his impressionable, formative years, but only after he had acquired some intellectual immunity, once said of the Dynamic Stochastic General Equilibrium approach which for a while was the staple of central banks’ internal modelling: “It excludes everything I am interested in”. He was right.; It excludes everything relevant to the pursuit of financial stability.
Menzie Chinn from Econbrowser did a useful overview of the initial flurry (see also the Economist) as well and ended up arguing that the “modern macroeconomic apparatus” should not be jettisoned. Indeed, Mr Chinn points out (using his own experience) that his own PhD experience was not doctrinate. I believe him of course, but I would still argue that right from the early steps as an undergraduate those who do not devote considerable time and effort into making their research proposals on the basis mathematically rigorous micro founded models may find their chance of proceeding as academics diminished.
In my own work as an economist which centers on demographics and economics the issue on micro foundations is acute. The life cycle framework (or even the Permanent Income Hypothesis) are both micro founded models which have been widely used to form aggregate models. But we also know that many of the most obvious conclusions from such exercises are untrue (e.g. the extent of dissaving as a population ages). Perhaps these inconsistencies with economic realities can be explained on the micro level (and I certainly think we should try to address them there), but there is also a need for a pure macroeconomic theory of how population dynamics affect complex macroeconomic processes.
On the state of macroeconomics itself, an colleague once told me that economics was fine mainly because it stuck to doing what it did best. I only conditionally agree. Learning economics is a brilliant way to cultivate a sharp mind and it is also offers a reasonably good framework to make sense of the processes which govern society and human behavior. However, the way economics is often narrated as sub-discipline of math and physics is unfortunate. I am all for quantitative analysis and use it every day in my own work (mainly empirical work), but I would think that the reason Mr Lewis finds it difficult to come up with a name of the alternative to mainstream macroeconomics is precisely because such an alternative does not currently exist. That is a pity.
Watching Europe sink into recession – and Greece plunge into the abyss – I found myself wondering what it would take to convince the chattering classes that austerity in the face of an already depressed economy is a terrible idea.
After all, all it took was the predictable and predicted failure of an inadequate stimulus plan to convince our political elite that stimulus never works, and that we should pivot immediately to austerity, never mind three generations’ worth of economic research telling us that this was exactly the wrong thing to do. Why isn’t the overwhelming, and much more decisive, failure of austerity in Europe producing a similar reaction?
Let’s lay out some definitions first: GDP, by definition, includes government spending; success, according to Keynesians, is some amount of economic growth (measured over arbitrary time periods and in the aggregate); austerity, by definition, will generally require cutting government spending. Now, Keynesians generally don’t care where increases in GDP come, so long as increases occur. Austerity, though, very much emphasizes balancing government budgets, which generally means cutting spending since it is rare for a government to a) be running only a minor deficit and b) raise tax rates enough to cover the current deficits. Thus, austerity usually requires a significant cut in government spending, and thus a cut in GDP (since government spending is a component of GDP). Thus, complaining that austerity doesn’t immediately lead to economic growth is like complaining that water is wet, in that we’re only really dealing with definitions.
Furthermore, austerity does not directly concern itself with growth. As was mentioned before, austerity is mostly about balancing a government’s budget (to put it crudely). Trying to evaluate austerity in Keynesian terms, then, is somewhat disingenuous as austerity does not have Keynesian goals, nor does it concern itself with the Keynesian analytical framework. Rather, austerity focuses on paying back government creditors, and that is thus the framework by which it should be analyzed. To use Keynesian metrics and goals to measure the success of austerity measures is akin to analyzing quarterbacks by their OBP. In both cases, the analytical framework simply is not suited for the thing being analyzed. Therefore, it is safe to say that only a fool, an ignoramus, or a liar would judge austerity by the economic growth it provides.
Capitalism is currently undergoing its most serious crisis since the Great Depression. The solutions offered by the Right are the same as they were then: Do nothing and let the natural cycle of business (the invisible hand of the free market) straighten itself out. Well, that’s not going to work. Hoover did that for three years and had nothing to show for it. Rooseveldt’s [sic] approach of course made sense. Recessions and depressions mandate an activist state and its massive intervention, otherwise, you’re in Hell forever. But then, I’m a Keynesian, eh?
First, we have a little bit of term conflation to start things off. If capitalism is defined as anything approaching the free market, then what’s happening right now in America is not a crisis of capitalism. Corporatism, maybe.
Or the-electorate-wants-all-the-benefits-of-socialism-without-actually-paying-for-it-or-allowing-the-government-to-regulate-them-ism (aka magical-rainbow-unicorn-ism). At any rate, the current crisis is not one of capitalism, the free market, or laissez-faire, because none of those actually exist outside of theory in America these days.
Second, Hoover was not laissez-faire by any stretch of the imagination. Unless laissez-faire now means interventionist statism. The difference between Hoover and Roosevelt is like the difference between Bushitler and Obamao: it’s of degree, not kind.
Third, the solutions offered by the right are not, so far as I know, “do-nothing.” They might be non-interventionist, but that now requires removing market impediments (which, it should be noted, is the very definition of doing something). At any rate, most of the right’s proposals ten to be along the lines of reducing* taxes, deregulating* businesses, and reducing* spending.
There are probably other fallacies I’ve overlooked. If so, point them out in the comments.
*Note that all of these words are verbs, which are action words. In essence, each of these words means doing something.