Commenter Blue Aurora points me to this review by Michael Emmett Brady (screwy spacing is copied in from Amazon):
"J. M. Buchanan's(JMB)book is completely mistitled and out of date.Nowhere in any of Keynes's writings does Keynes ever advocate a policy of deficit finance,which is actually the brain child of Abba Lerner,a member of the American Keynesian-Neoclassical Synthesis school of economics.Lerner used the term functional finance to describe deficit finance.During a visit to America in 1944 as the representative of England's Treasury Department,Keynes totally disagreed with Lerner's approach.Keynes's approach is an advanced version of the cyclically balanced budget first laid out in clear terms to the Pharaoh by Joseph some 3,700 years ago-build up a surplus in the good years that will cover the deficits of the bad years.This is the first statement of what economists call a countercyclical fiscal policy.Keynes's additional provision is that the budget be split into two categories-one of which would be a capital budget.The government could only run deficits in the provision of capital projects in public infrastructure(building dams,reservoirs,water projects-irrigation networks,seaports,airports,public transportation projects,public schools,colleges and universities,public research laboratories,etc.,)that would pay for themselves in the long run.Nor was Keynes an advocate of tax cuts in an economic downturn except for temporarily suspending the social security tax for workers only.Keynes's major policy recommendation was the maintenance of low interest rates combined with a central bank policy of eliminating loan availability for speculative undertakings(greenmail,leveraged buyouts,hostile takeovers,margin account loans,corporate raiders,junk bonds,etc.).The correct title for JMB's book up until 1981 is"Democracy with minor to moderate deficits:The Political Legacy of the American Keynesian-Neoclassical Synthesis School".After 1981,JMB should have retitled his book as"Democracy and Catastrophic Deficits:The Political Legacy of Laffer,Reagan,and the 12 years of the Two Bush Presidencies" .The national debt when President Reagan took office stood at 925 billion dollars.As of July,2005,the national debt will have surpassed 8 trillion dollars.The Libertarian-pseudo conservative policies of tax cuts,borrowing and excessive spending of 8 years of Reagan and 12 years of the two Bush presidencies has increased our national debt by a factor of 9.JMB needs to completely rewrite his book.First,he needs to incorporate the theoretical foundations of the story of Joseph and the Pharaoh from the Old Testament.He will probably need to purchase a bible in order to correctly cite verse and page.Second,he needs to obtain a copy of Keynes's General Theory and read what Keynes actually wrote and not what Henry Hazlitt claims what Keynes meant in his 1959 "Failure of the 'New Economics'".
He makes the point I do about other influences on the deficit after 1980 (if we're blaming any economists for the dirty work of politicians, that is). In this Lerner/Keynes fight I actually side with Lerner - and I think the post-war experience has vindicated him. We can run deficits indefinitely. The trick, of course, is how fast the deficits grow relative to the economy.
Tuesday, November 1, 2011
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And just for the record, Michael Emmett Brady is basing his claim that John Maynard Keynes was opposed to deficit finance from correspondence between John Maynard Keynes and James E. Meade.
ReplyDeleteBrady cites pages 215 to 410 of "The Collected Works of John Maynard Keynes Activities 1940-46: Volume XXVII, Shaping the Post-war World: Employment and Commodities". Brady also apparently covers Keynes's opposition to deficit finance in his doctoral dissertation ("The Foundation of Keynes' Macroeconomic Theory: His Logical Theory of Probability and Its Application in The General Theory and After").
I agree. When governments can and do spend as much money as they want, there is no need for the surplus in good times for deficits in bad times approach.
ReplyDeleteWhat really matters is how much private investment we risk crowding out. Instead of surplus in good times and deficits in bad times, we need only low deficits in good times and very high deficits in bad times. That way, inflation and interest rate problems are minimized.
Plus, even though Keynes never recommended tax rate reductions during recessions, I believe it is advisable. Taxes today are purely a political tool; they are not needed for government solvency in an age when governments can and do spend as much money as they want. Taxes are just for political posturing. Keep the political posturing in good times, but discard them in bad times. And it is especially hypocritical for people advocating expansionary fiscal policy to demand recession-time tax hikes.
"...and I think the post-war experience has vindicated him. We can run deficits indefinitely."
ReplyDeleteA timespan of sixty-six years doesn't vindicate anything.
Then how about the math of it?
ReplyDeleteThe only risks ever posed have been when the debt grows faster than GDP. This is what the math says too. And we have no (1.) examples, (2.) theory, or (3.) arguments for why you couldn't. None at all.
The only leg you have to stand on is if you think debt is ethically wrong or something like that - but that's a different question entirely and of course says nothing about its sustainability.
If you've got a counter-argument - if you have any substantive criticism at all - as always, I'm all ears.
Again, sixty-six years doesn't vindicate anything. Now five hundred or a thousand years might.
ReplyDeleteYes - I read you the first time.
ReplyDeleteExplain to me exactly what you're thinking might hold in sixty six years that won't hold in five hundred years.
The UK clearly shows we can carry a public debt for centuries (over three centuries now). Granted they weren't running deficits, but you've still opted out of explaining to me how the math of running sometimes surpluses and sometimes deficits gives you an answer that doesn't also imply that you can run deficits persistently.
If you're not going to speak to these points, why comment? This is not a controversial assertion I'm making, at least not for people who understand this stuff. What are you claiming I'm misunderstanding? Can you be at all more specific than just referencing the sixty six year period. It's a fairly simple problem - I can't see that many places for error, and for some reason you're not forthcoming with why you think five hundred or a thousand years would give you a different answer.
You just like bigger numbers?
Come on Gary - get serious for once.
Why does this make a difference? What changes?
Daniel,
ReplyDeleteI don't judge the ground beneath me based merely on the last sixty-six years of experience.
I realize that you think the experience of the United Kingdom is one that puts a good light on the deficit spending position, but I don't - the UK defaulted enough over that time period to show that it did not have terribly firm control over public debt (the number of defaults is at least six since the 1750s - which is only a slightly worse performance than that of Spain). Probably the Dutch experience during their wars with the Hapsburgs is a better fit (the whole business of lenders crying once the Dutch started paying off the principal being one of those anecdotal examples that people have a hard time letting go of).
Anyway, one of the things that has struck me about the whole sovereign default issue (and we've had a number of them recently) is just how blindsided so many people were by it. Why were they so? Because it was simply something that modern, developed nations in the West no longer did - well, they didn't do in the post-WWII period at least. That to me (a) illustrates an enormous condescension towards the historical record and (b) a certain level of ignorance on a range of related topics. In other words, the the last big period of sovereign default crises (before our current set of them) in the West came during the 1930s when all manner of abrogations, restructuring, etc. occurred (think here of what the U.S. vis a vis what it owed Panama in 1933 and you see the typical things that states were doing at the time). Just enough time passed for many people to think that this sort of thing wasn't possible.
When did the UK default exactly? Reinhart and Rogoff don't record any if I recall and Wikipedia mentions only a few well before the modern public debt (which is - I thought was obvious but perhaps I should clarify - what I'm talking about - not a king defaulting).
ReplyDeleteBut this is confused anyway. Why do countries default. What happens to their deficit levels to make them default?
Your mind has somehow twisted my claim into "countries can never fail or default" which obviously I haven't said. If you want to argue with someone who thinks "this sort of thing isn't possible", then find someone who thinks that. Of course it's possible - it happens all the time.
But it happens as a result of certain conditions.
Since the Act of Union in 1707 the UK has defaulted at least five times; probably seven. Whoever these Rogoff and Reinhart people are I cannot say, but this is pretty standard stuff that you learn in say a survey course like "Making Modern Britain."
ReplyDelete"Your mind has somehow twisted my claim into 'countries can never fail or default' which obviously I haven't said."
I never wrote anything like that. It never ceases to amaze me how everything has to be about you.
"If you want to argue with someone who thinks 'this sort of thing isn't possible', then find someone who thinks that."
I never claimed that you thought that Daniel. I was making a general observation about the state of things; it was not a comment about you.
As for the exact dates and circumstances I'll have to consult some books and research notes if that's what you really want. But one was in the early 1750s, another three at least in the 1800s (1820s and then a few later in the century spring to mind), and then of course there was the default associated with the Great Depression.
ReplyDeleteGary you mix disagreements with me with general observations and then get bent out of shape when people can't read your mind. This is not the first time this has been brought to your attention, and not just by me. I suggest you make this clearer in your comments.
ReplyDeleteIf you are not criticizing me, I'd just say you're making an extremely obvious point which I agree with and which I can't imagine is very controversial to anyone that takes even a modest interest in this stuff.
I'd be interested in details on these defaults. Reinhart and Rogoff are widely regarded as the preeminent experts on sovereign debt crises. They recently published a very good and widely celebrated book on the topic.
"Gary you mix disagreements with me with general observations and then get bent out of shape when people can't read your mind. This is not the first time this has been brought to your attention, and not just by me. I suggest you make this clearer in your comments."
ReplyDeleteYou see, there are these things called paragraphs; each paragraph deals with a particular idea or theme. Or at least that's how I used to teach writing.
"If you are not criticizing me..."
If I ever criticize you I will be rather direct about it (as I always am). There will be no need to guess.
"...I'd just say you're making an extremely obvious point..."
Not so obvious to lots and lots of investors, etc., and only obvious to many after the fact. Indeed, if it were so obvious clearly we'd be in much of a less of a mess than we are right now.
"Reinhart and Rogoff are widely regarded as the preeminent experts on sovereign debt crises."
Amongst historians, just to give an example, the question of why some states in early modern Europe defaulted more than others has been a live issue for, well, decades. To be more concrete, compare and contrast the experiences of the Dutch and the Spanish during the reign of Philip II - why were the Dutch somewhat less default happy and also better at garnering borrowed funds by which to fight Philip's armies?
"I'd be interested in details on these defaults."
It will have to wait until tomorrow. This is something I only tenuously remember. The first default does come during the reign of one of the Hanoverians (George II probably).
re: "Indeed, if it were so obvious clearly we'd be in much of a less of a mess than we are right now."
ReplyDeleteI disagree with what I think is an implication that investors' alleged lack of awareness of sovereign debt problems put us where we are now. Investors are well aware of these issues even if the public may not be, and the origin of our problems has nothing to do with an underestimation of the risk of sovereign default (other sorts of default, perhaps).
re: " To be more concrete, compare and contrast the experiences of the Dutch and the Spanish during the reign of Philip II - why were the Dutch somewhat less default happy and also better at garnering borrowed funds by which to fight Philip's armies?"
I think I've told you about this before, but one of my favorite books on this topic is called "A Free Nation Deep in Debt". It starts with a lot of the Italian developments but after that it spends a considerable amount of time on Philip's defaults and the emergence of modern public finance in the Netherlands. It makes essentially the Weingast and North argument about accountable political institutions and public debt.
Looking forward to Britain. I wasn't aware of a single default after the establishment of the BOE (there were some in the late Middle Ages I believe - but those were more due to imprudent monarchs like the case of Philip), so I'd be very interested in hearing about it.
Interesting discussion. I also enjoyed "This Time is Different: Eight Centuries of Financial Folly" by Carmen Reinhart and Kenneth Rogoff.
ReplyDeleteSorry to go off-topic Daniel Kuehn, but will you be answering e-mails in December? I've assembled some stuff for you to save for your reference...will you finally be free then to read them, and respond back to my e-mail?
"Investors are well aware of these issues even if the public may not be..."
ReplyDeleteRight. Well, that was not the impression I got from this interview: http://www.npr.org/player/v2/mediaPlayer.html?action=1&t=1&islist=false&id=140948138&m=141041912
Way back in 1998 and 1999 lots and lots of people were arguing that bubbles were history; that a sort of permanent, non-cyclical world was at hand. About that time I was writing a paper which had me doing a bit of research on the South Sea Bubble and that research led me to be quite skeptical of such claims (which were being made both inside and outside government, etc.). I think a similar mindset was in fashion regarding public debt as little as two to three years ago.
That's because they aren't called "defaults" by economists I would imagine; they are cramdowns, consolidations, restructuring, etc. Of course the creditors in all of these instances are getting something other than what they bargained for, and the British government was telling them to take it or leave it. This is essentially what Philip II did as well, though he suspended payments for a time, whereas the British government did not, they merely unilaterally changed the terms of the agreement (often by decreasing the amount of payment in the process).
Philip's main problem was the same problem all major empires have; too few resources to fight all the fires he had to deal with. The Dutch had the advantage of friendly English and French governments which were willing to spend fair amounts of filthy lucre to keep the low countries out of Spanish hands (Parma's army was the main threat in the effort to invade England in 1588 after all - not the armada itself, which was mostly a means of transport and supply).
The beauty of our times is that it illustrates the limits of our wisdom and the weakness of our institutions. Corrections like this ought to do that, but counterintuitively it may not.
ReplyDeleteI am quite happy to wait a thousand years or ten to see if right wing economic ideas work; why not apply the insights of Keynes until we have had enough time to prove the contrary point of view? Best not to rush into errors.
ReplyDelete