Tuesday, July 19, 2011

The Short List - July 19, 2011



Colin said...

Klein seems to be taking aim at a strawman. The entire sum of his evidence that Keynesian economics has been misunderstood is a quote from Eric Cantor, who last I checked isn't any kind of expert on economics or anything else.

The problem with Keynesianism isn't that it's misunderstood -- increased government spending during economic downturns to stimulate demand is a pretty easy concept to grasp -- it's that it doesn't work. It didn't work during the Depression, took another blow during the stagflation of the 1970s, failed again in Japan during the 1990s and isn't working now either.

Isn't one definition of insanity doing the same thing over and over again and expecting a different result?

Jason said...

I think Klein is focusing on how Keynesian economics has been chained to other words anathema to conservatives today like socialism. That's not a strawman, it's a wide held ignorance to the underlying theory.

As to your claim that Keynesian economics doesn't work, it's worth noting change in GDP during the periods you cite. According to the Bureau of Economic Analysis, from 1933, FDR's first year in office, to 1939 average GDP growth Y2Y was 7%. This is compared to the average GDP decline from 1930 to 1932 of -9.4% (BEA figures don't go farther back then 1930). It is a common refrain for critics of Keynesian economics to say that Keynesian remedies were bound to fail and it was only WW2 that truly lifted us out of the Great Depression. That sort of alternative hypothesis testing is hard to do, as we've discussed in the path.

As to stagflation, the concept of Keynesian economics encountered a situation not encountered in the past and the original theory proved inadequate. Neo-Keynesian economists dis-aggregated the causes of inflation into demand-pull and cost-push categories, with the former tied to aggregate demand and the latter tied to aggregate supply. We currently find ourselves with slack in demand, which makes traditional Keynesian remedies ideal.

As to Japan, I fail to see how Keynesian remedies were implemented in that situation.

Colin said...

Given that government spending is one component of how GDP is calculated, I don't find it a very useful metric for assessing economic health in this context. Increasing such spending will increase GDP by definition. By this rationale WWII was a great time for the economy as GDP shot up 28% in 1944.

Here are two quotes worth pondering with regard to the US economy under the New Deal/Keynesianism:

Never forget, never forget, and I think it’s very important for Democrats especially to remember this, that if Hitler had not come along, Franklin Roosevelt would have left office in 1941 with an unemployment rate in excess of 15 percent and an economic recovery strategy that had basically failed. -- Larry Summers, former Treasury Secretary and head of the NEC

"We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot." -- Treasury Secretary Henry Mogenthau writing in his diary in 1939.

You are correct that Keynesianism couldn't explain stagflation, which is why the theory had to be reworked with the subsequent rise of neo-Keynesianism. This would seem to suggest some real flaws in the approach.

As for Japan, I will quote from wikipedia:

Japanese policymakers tried a series of government economic stimulus programs and bank bailouts. A 2.4% budget surplus in 1991 turned to a deficit of 4.3% by 1996 and 10% by 1998, with the national debt to GDP ratio reaching 100%. In 1998, a $500 billion bank rescue plan was implemented to encourage bank lending and borrowing.

If you don't see massive government spending and deficits during a downturn to stimulate demand as Keynesian, we must be operating from different definitions.

Jason said...

It should be noted that the 15% unemployment rate Summers mentions is about half what the rate was in 1933. I can't find a source, but I'm all but certain the unemployment rate in 1933 was in excess of 30%. Now that contradicts Henry Morgenthau's claim, but I stand by mine without citation. Feel free to disregard.

The size of a stimulus matters, as we've discussed in the past, so I can't fully judge Japan's strategy without that information. Superficially, the moves would appear to be Keynesian, but Krugman has criticized the Japanese response as being too modest. Japan, meanwhile, is still the third largest economy in the world and was only fairly recently overtaken by China.

As to whether or not Keynesian economics "works" we would need to define what that means. If the goal of Keynesian economics is to sop up excess demand, then it does "work" in the short-term.

Finally, Colin, my question to you, and it's not a new one, what happens in the absence of Keynesian economics and the absorption of excess demand? What are people to do? I tend to believe the market will correct itself in the long-run. Course, in the long-run we're all dead, so it matters what we do (or don't do) now.

And to bring it back to Klein's original point, would you agree, apart from whether or not you think Keynesian economics "works," that in the lexicon of the majority of today's conservatives that the term "Keynesian" is considered synonymous with "socialist" and a close relative to "communism?" And if you agree, would you agree that this perception misrepresents what Keynesian economics actually means?

Colin said...

30% is incorrect. According to wikipedia unemployment peaked in the low 20s
while this site says 23.6 percent.

Now, one can claim that hey, unemployment did decline, however slowly. True, but compared to what? As wikipedia notes, Australian unemployment peaked at 29% in 1932 and declined to 11% at the start of WWII (which for Australia of course was 1939). Wikipedia also notes that unlike the US or New Zealand, "there was no significant mechanism for economic recovery in Australia" and that "there was no significant banking reform or nationalisation of private businesses."

This doesn't appear to reflect well on Keynesianism.

As already noted, Japan's budget went from a 2.4% surplus to a 4.3% deficit five years later and a 10% deficit 7 years later -- swings of 6.7% and 12.4%. This suggests government spending on a massive scale, which placed a heavy emphasis on infrastructure as discussed here. As for Krugman, his response to the failures of Keynesian policy is invariably that it was too small. It's an approach that makes it impossible for him to be wrong. In any case, Krugman is addressed vis-a-vis Japan pretty effectively in The New Republic here.

The fact that Japan is the world's third largest economy, meanwhile, is completely irrevelant. The US could have double-digit unemployment, zero GDP growth and remain the world's largest economy for many years to come, given we have a nearly $9 trillion lead on the next biggest economy, China. But so what?

Colin said...
This comment has been removed by the author.
Colin said...

It seems to be the goal of Keynesian economics is to promote economic recovery faster than would otherwise be the case. But by this standard it is a failure. As already shown it had a poor showing in the Great Depression, had its shortcomings again exposed in the 1970s, failed in Japan during the 1990s and isn't working now either.

As for your first question, I am not even sure I understand the premise. Absorbtion of excess demand? I thought the whole point of increased spending was premised on the belief that there is insufficient demand that the government had to stimulate. Absent government intervention, the economy will reallocate resources away from unproductive sectors to more productive ones, producing a recovery. Keynes's statement that in the long-run we are all dead, meanwhile, is just glib nonsense. Recoveries don't take generations in the absense of government spending. The depression of 1920-21, for example, saw unemployment suddenly shoot up following by a sharp decline back to normal levels only two years later despite (because of?) the absense of any significant government intervention.

Lastly, I don't pretend to know what word associations most conservatives have. However, I don't think even Klein would dispute that Keynesianism is the dominant economy theory of socialists. While not all Keynesians are socialists, almost all socialists are Keynesians.