Thursday, May 24, 2012

Quote of the day, from Leon Keyserling

This is from a 1965 New York Review of Books comment agreeing with Daniel Bell's dismissal of the problem of "automation" for employment. He discusses that in the first paragraph, but I found this next passage particularly interesting:

"I agree also with Dr. Bell that an adequate rate of economic growth, which means growth in total demand, would result, with relatively unimportant exceptions, in corresponding modifications in the structure of the labor force, which means that the problem of “structural unemployment” has been grossly exággerated. But Dr. Bell perhaps does not stress sufficiently that vast changes are needed in what I call the structure of demand, or the internal composition of aggregate demand, in that the extent to which a given expansion in demand and production will increase employment depends greatly upon the rates of productivity advance in the particular areas of production against which the demand is exerted. These rates of advance in productivity vary greatly in various sectors of the economy, and also there are wide variations as to the amount by which demand for various products may be expanded in terms of the needs and desires of the people, even assuming that they have plenty of money to spend. This observation supports the very important conclusion, reached by Dr. Bell on value judgments which I devoutly share, that the changes in the structure of demand required to restore and maintain maximum employment require very much more emphasis upon expanded public spending, and a halt to the veritable orgy of tax reduction in which we have thus far engaged. We cannot, with a continuation of this horrible over-reliance on tax reduction as the main weapon of policy, clear our slums, rebuild our cities, meet our grossly under-serviced educational and health needs, replenish and expand our natural resource base, bring our levels of Social Security and welfare payments up to the standards justified by our productive capabilities, nor mount anything approximating a full-scale war against poverty."

This is an externality problem applied to macroeconomic policy. Guaranteeing full employment is one thing, but guaranteeing an optimal full employment, from a welfare (or as he calls it here - a "value" perspective) is something else entirely. This is one major advantage that fiscal policy has over monetary policy, aside from all the "zero fiscal multiplier if that's what the Fed wants" stuff.


  1. Well, government spending has gone from 28% of GDP to almost 40% since that was written, and we've managed to make the inner cities far, far worse and educate our children less well. We launched a war on poverty that made the poor worse off. We expanded welfare, which turned out so badly that even liberal Democrats finally gave up on it.

    Is this quote intended to show how delusional planners were in the mid 60s?

    1. No this is a good point you raise and I agree with it. I jumped into the economic research world at the Urban Institute in the mid-2000s when they were just wrapping up a binge of research on lessons from welfare reform. Absolutely we know a lot more about what does and doesn't work addressing poverty. Keyserling is sufficiently vague here that this passage probably gets off the hook (although certainly he supported other policies that have turned out to be not so wise).

      The issues we've been working out are largely microeconomic in nature. What attracted me to this passage was its recognition that full employment output is not the same thing as welfare-optimizing output. That point, I think, is an important one. I also like the point that because of different demand elasticities for certain products, macroeconomic policy is going to affect the composition as well as the volume of aggregate demand (this is related to the first point, of course).

      These are crucial insights when we approach macroeconomic policy.

      I'm not entirely sure I agree with the link between raw spending and performance. A lot of the increase has been on health spending (this is in 1965 notice! Medicare and Medicaid, anyone?), which has its own "cost curve" problems that probably would have posed issues no matter how the financing was structured. Anyway - if you're looking for me to say "throwing money at a problem will solve it", I can't say that. I highly doubt Keyserling would say that either.

  2. btw - speaking of Keyserling specifically, a lot of his suggestions around a job guarantee and things like that simply weren't tried, so it's pretty hard to judge him. He did want guaranteed welfare for those who couldn't be employed, which is some of what "even liberal Democrats" fixed, but it's hard to put all that on guys like Keyserling, who openly said that we can't just throw all these people into a generous safety net.

    I am just getting familiar with Keyserling - I can't vouch for everything that came out of him. But I don't think it makes too much sense to identify him with all the social policies that politicians over the last five decades ended up cobbling together. I imagine he'd stand as a critic on many of the same problems that you and I would.


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