So one of the things I was thinking with this Russ Roberts stuff is "exactly what did Keynes expect?". It's pretty obvious to me that Samuelson was just working off of some shoddy expectations based on the post-WWI period, but this is obvious to me because I've spent some time reading up on the post-WWI period. What did Keynes say?
I didn't actually ask that in my email response to him this morning, but LK has it:
"In 1943 — the same year Samuelson got it wrong — Keynes was giving a lecture at the Federal Reserve and was asked by Abba Lerner about the possible economic problems of the post-war period. Keynes’s reply is significant:
'Keynes harshly rejected the risk of post-war stagnation, holding that because of Social security there would be a large reduction in private saving and so that would be no problem'
D. C. Colander and H. Landreth (eds), The Coming of Keynesianism to America, E. Elgar, Cheltenham. 1996. p. 202.
In other words, Americans now had the security of welfare programs that allowed them to free up more of their income in spending.
What kind of analysis of the post-war boom ignores what Keynes — the founder of Keynesian economics — thought about this question? Samuelson was simply wrong; Keynes was right."
It's not exactly the defense I would have expected, but an interesting find nonetheless. The fact is, WWII years were characterized by excess demand which is exactly why you saw massive crowding out of private spending which Bob Higgs documents so well. A sharp drop from "excess demand" does not imply "deficient demand".
Friday, July 15, 2011
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Well Keynes wasn't really right becuase savings levels remained relatively high in the post war era (that's one of Higg's big contributions) and savings was the basis for the post war boom since it represented a "savings glut" that played a major role in financing the postwar "housing bubble".
ReplyDelete"Savings was the basis for the post war boom" sounds like the savings got invested.
ReplyDeleteIf the savings got invested it sounds like liquidity preference was low. I don't think it would be going out on a limb to say that social insurance plays an important role in the level of liquidity preference.
So social insurance leads to more individual saving? Is that what you are arguing?
ReplyDeleteWell its more complex than that. Households were both savers and borrowers at the same time. The problem is measuring savings in NIPA. Its measured as a residual and housing is measured as investment so if S=I.
ReplyDeleteSo two parts of buying a house are a down payment (if you aren't a veteran) and a mortgage
The down payment is just a shuffling around of savings (changing what assets you hold from a bank account to equity in your house) and will not show up in NIPA.
The mortgage is borrow and that has to come from somewhere, it comes from someone else's savings where as the house itself when its built is recorded in investment.
The only part of that that isn't S=I is your monthly mortgage payment that shows up in consumption but you just bought a house which is a major purchase.
But whats the liquidity preference there? The post war financial arrangement (i.e. GI Bill FHA) allows you to hold your liquid savings form the war while making large purchases (roughly speaking this arrangement works for all durable goods)
Anyway, I may not have explained this very well but Im writing my dissertation about this debate and I have a draft of a chapter that outlines the above argument in a format a little more extensive than a blog comment. You seem interested in this debate and a friendly ear, if you want you are welcome to email me and I'll send you the chapter. I'd be curious what an *ahem* orthodox Keynesian thinks of my argument.
Very interested in what you've done on this: dan.p.kuehn@gmail.com.
ReplyDelete"Well Keynes wasn't really right becuase savings levels remained relatively high in the post war era (that's one of Higg's big contributions)"
ReplyDeleteRelative to what??
Really, what are you even talking about? Have you even bothered to look at the US personal savings rate from 1940-1970?:
http://themoderatevoice.com/32812/ideas-whose-time-have-comerealistic-projections/
(see second graph)
It shot up to 20-25% during the war, then plummeted to under 5% by about 1947, then rose only slightly to 7-8% for the 1930-1973 period.
You're telling us a drop from 25% savings rate to under 5% wasn't a massive reduction?
"then rose only slightly to 7-8% for the 1950-1973 period."
ReplyDeleteRelative to what you would expect given the combination of +20% savings rates during the war the massive pent up demand created by war shortages of housing and durable goods and the Fed's maintenance of low interest rates in the immediate post war period.
ReplyDelete"Relative to what you would expect given the combination of +20% savings rates during the war the massive pent up demand created by war shortages of housing and durable goods and the Fed's maintenance of low interest rates in the immediate post war period."
ReplyDeleteTell me: does a personal savings rate in 1947 of under 5% seem high to you?
What did you "expect" it to be?
Also: the US had a recession from November 1948 to October 1949, and 1948 saw a slight rise in the personal savings rate.
In 1949, a recovery began, and in that year savings rate fell again.
There should be dissavings (i.e. you would expect it to be less than 0%) particularly if you buy Dans argument above or you buy the traditional Keynesian story of spending down liquid savings after the war.
ReplyDeleteAt any rate, in his 1940 essay How to Pay for the War Keynes had also essentially described or “predicted” (if you like) what would happen after WWII:
ReplyDelete“Thus by elimination Keynes found fiscal measures at the centre of his wartime financial vision. Through taxation, the authorities would take command over current resources from present income earners for wartime purposes. A portion of such command over resources, credit to the taxpayer as post-war deferred pay, would be released to expand consumption in the first post-war slump. The deferred pay scheme and the release of credits financed by a capital levy after the war would ensure a more equitable distribution of wealth after the war than would the voluntary savings or inflationary methods of war finance.”
Moggridge, D. E. 1975. “Economic Policy in the Second World War,” in M. Keynes (ed.), Essays on John Maynard Keynes, Cambridge University Press, London. p. 182.
Since rationing, price controls and the massive effort to encourage people to buy war bonds did precisely this in the US and the UK, I fail to see how anyone can deny that Keynes had foreseen what would happen post-1945.
"There should be dissavings (i.e. you would expect it to be less than 0%) particularly if you buy Dans argument above or you buy the traditional Keynesian story of spending down liquid savings after the war."
ReplyDeleteThere is no logical reason why it should have been 0% at all. That there was massive pent-up demand - satisfied by drawing on the accumlated stock of savings and by far lower savings rates than those from 1941-1945 - does not mean that suddenly in 1946 there was zero liquidity preference.
A positive savings (a flow) rate means that households were on net adding to their "stock of wealth" (a stock) which means necessarily that their stock of wealth was not being spent down. If households are saving then that by definition means they are not consuming (ignoring taxes) their entire incomes over the course of the year. If households are not consuming even their entire incomes then there cannot be any net dipping into their stock of wealth.
ReplyDeleteI would like to point out that above I am not arguing that there was no "dissavings" only that it does not appear in the numbers and that the mechanism is more nuanced than simply spending down liquid savings (like savings accounts and treasury bonds).
That rich or some middle class households were not dissaving is obviously the explantion, since lower income earners were dissaving:
ReplyDelete"Moreover, there was a sharp upward trend in the amount of dissaving by the lower-income groups from 1945 through 1948 ..."
U.S. news & world report, Volume 28, p. 71.
Even Robert Higgs admits:
"How then did consumers finance their surge of spending during the postwar recovery of the private economy? The answer is, in nominal terms, by a combination of increased personal income and a reduced rate of savings; in real terms, simply by reducing the rate of personal savings. Between 1945 and 1946, when personal consumption spending increased by $23.7 billion, annual personal savings dropped by $14.4 billion, and personal taxes fell by $2.2 billion; increased (nominal) personal income financed the balance of the increased consumption. Between 1946 and 1947, when personal consumption spending increased by $17.3 billion, annual personal savings dropped by $5.2 billion, and personal taxes rose by $2.7 billion; increased (nominal) income financed the balance of the increased consumption. Between 1947 and 1948, when personal consumption spending increased by $12.9 billion, increased (nominal) personal income accounted for more than the entire increase, as personal taxes fell by just $0.2 billion and annual personal savings actually increased by $6.1 billion. Clearly, during the critical first two years after the war, the ability of consumers to spend more nominal dollars (+$41.0 billion) for consumer goods depended overwhelmingly on just two sources: increased personal income (+$20.5 billion) and reduced annual saving (-$19.7 billion)."
And corporations and businesses did liquidate their bonds:
The postwar resurgence of the private economy rested on an investment boom as well as a consumer spending surge. In current dollars, gross private domestic investment leaped from $10.6 billion in 1945 to $30.6 billion in 1946, $34.0 billion in 1947, and $46.0 billion in 1948. Relative to GNP, that surge pushed the private investment rate from 5.0 percent in 1945 (it had been even lower during the previous two years) to 14.7 percent in 1946 and 1947 and 17.9 percent in 1948.21 As a standard for comparison, one may note that the investment rate had been nearly 16 percent during the latter half of the 1920s, before hitting the skids during the depression.22
Firms could finance their increased investment spending in part because, unlike individuals, they did unload some of the government securities they had acquired during the war. Between 1945 and 1946, holdings of public debt by corporations (exclusive of banks and insurance companies) fell by $6.9 billion; they fell by another $1.2 billion in 1947 before rising by $0.7 billion in 1948
http://www.independent.org/publications/article.asp?id=109
I said above: "the US personal savings rate ... shot up to 20-25% during the war, then plummeted to under 5% by about 1947, then rose only slightly to 7-8% for the 1930-1973 period."
As far as I can see, even the libertarian Higgs' analysis totally supports that assertion.
To address your highlighted portions.
ReplyDelete1. No one is arguing that the rate of savings wasn't reduced from 20%+ to 5%.
2. If you actually decompose NIPA data on investment you see that the investment boom was driven by residential investment.
3. I dont see what this has to do with our argument about households except that it is the evidence that Higgs uses to prove that the post war boom was a supply side boom which is the opposite of what you are arguing (and also the opposite of what I'm arguing). Actually, I'm not entirely sure what we are arguing about anymore.
Sorry Higgs doesn't prove anything, he uses corporate disinvestment as evidence to argue for a supply side boom.
ReplyDeletearg, corporate dissavings.
ReplyDeleteAnd also when Keynes said that there would a "large reduction in private saving and so ... would be no problem" (owing to social security) was he thinking precisely of the massive fall in savings rates from the high rates in the war years that did in fact happen?
ReplyDelete"1. No one is arguing that the rate of savings wasn't reduced from 20%+ to 5%."
ReplyDeleteWhich is precisely what Keynes was probably talking about?
"If you actually decompose NIPA data on investment you see that the investment boom was driven by residential investment."
And this was caused by a massive surge in demand, so Higgs' "supply side boom" goes out the window:
"The collapse of the housing credit system during the Depression and the restrictions of the war period contributed to a tremendous pent-up demand for housing that exploded after the war. Housing production leaped from 140000 units in 1944 to 1 million in 1946 and close to 2 million in 1950."
John F. Walker, History of the U.S. economy since World War II, p. 360.
The corporate dissavings were used to finance investment (caused by massive pent-up housing demand), so again all I see is a confirmation of the Keynesian explanation.
That's fine, I see something more interesting and complex.
ReplyDeleteI just don't think Keynes was saying "Immediately after the war savings rates will go back to around what they were at the end of the depression and then increase a little bit around the time the housing boom really takes off ('49/'50)" which is what you are arguing here.
I think Keynes was making a more powerful statement about "savings smoothing" in which he was wrong about the mechanism.
Two things.
ReplyDelete1. I am confusing the two Keynes quotes at play here, my last comment was about his debt finance suggestion more than his social security quote.
2. Again, I'm not 100% sure what we are disagreeing about here other than the omnipotence of JMK.
I tend to think that the ability of the "Keynesians" to predict what would happen after the war is a complete sideshow that is meaningless. The Austrian crowd is grasping at straws here, the inability to make an accurate prediction is not at all the same as not having a reasonable theory or not having a reasonable ex post explanation. The failure to predict is the only failure they have to harp on and as LK has showed even that "failure" is mixed.
ReplyDeleteIt really doesn't matter what Keynes himself predicted; it matters what "Keynesians" generally thought at the time. Otherwise it isn't a terribly robust economic school of thought.
ReplyDeleteAndrew Bossie,
If one cannot make reasonably accurate predictions then there isn't much reason to be doing what you are doing unless you are just trying to be a historian. But economists claim more than just that - they claim a lot more about their "science." And as far as I can tell this is broadly true of all the economic schools - ABCT, Keynesianism, etc. There a lot of outsized and hyperbolic claims that economists make and they do it all the time and I understand why - there is a lot of pressure to come up with good answers or right predictions or whatever when may simply be outside the scope of their ability to do that.
This is why I look at Krugman's comments about economics being the closest thing to psycho-history and sort of laugh.
Anyway, personally, I believe Keynes should be dug out of his grave, made to strand trial for crimes against sartorial splendor and then sentenced to be summarily assaulted by a banana wielding ninja.
ReplyDeletere: "Anyway, personally, I believe Keynes should be dug out of his grave, made to strand trial for crimes against sartorial splendor and then sentenced to be summarily assaulted by a banana wielding ninja."
ReplyDeleteAnd apparently a good rule of thumb for Gary is "don't try to make people laugh on F&OST more than once in one day".
Daniel,
ReplyDeleteEconomics bleeds a person of their sense of humor while also making them chemically dependent on econometrics; they have a twelve step program for that - Econometrics Anonymous.
Step 1: One admits that is powerless over econometrics and that their life has become unmanageable as the result of the study of such.
Step 2: One admits the need for a high power in order to resolve this situation; namely history of the thick description variety.
And so on.
Wow - this just went from rule of thumb to scientific law.
ReplyDeleteGranted, that was a marginal improvement over banana ninjas.
Daniel,
ReplyDeleteAs a good friend my advice is this: the first step to recovery is admitting you have a problem with econometrics.