Monday, June 25, 2012

Clark on Keynes

As many of you probably saw, Clark Johnson has the first post in a series on Keynes and monetary policy over at Lars Christensen's blog. Johnson is a well regarded economic historian, and I found the post interesting if a bit puzzling. I hope to blog in more detail later when more of the posts come out.

I did not find it puzzling in a way that was different from how I always find market monetarists puzzling. The argument just seemed to boil down to "Keynes did like Roosevelt's devaluation a lot, but he also was pushing fiscal policy really hard so he thought monetary policy was ineffective" [my paraphrase, not his words... for new readers if I quote it's always written in blue - if it ain't blue, it's a paraphrase or a hypothetical exchange].

Johnson concludes this post with: "Yet Keynes seemed to dismiss this entire episode [the devaluation] in his call a few months later for fiscal stimulus!"

What I need explained to me is why "calling for fiscal stimulus" is equivalent to "dismissing monetary stimulus". You see this a lot, and maybe market monetarists have convinced themselves of the equivalence, but I can tell you a lot of us Keynesians are not clear on the argument.

Good info on the NRA in here. Bad policy - very bad policy. The important thing to remember is that although this is definitely part of the New Deal and needs to be laid at Roosevelt's feet, it's not a part of the New Deal that you'll find many economists applauding.

More later hopefully.


  1. Actually Daniel the on economist of standing who did applaud the NRA-or at least NIRA-is Eggertsson.

    What parts of the New Deal do economists applaud?

    To me there are plenty of things like ending child labor, the minumum wage, Social Security however evidently still 50% of econimists believe that the minumum wage brings causes higher unemployment

    1. I need to check that out! I had no idea Eggertsson was positively disposed towards the NRA. Do you know why?

      I think there's very broad agreement on things like Social Security as "good reforms" (obviously there are the usual suspects that take issue with that). Maybe a smaller pool that get excited about ending child labor and the minimum wage, but I think support is still pretty broad (if less fervent) for that.

      I'm thinking of the actual macro policy of the New Deal, and I think among people who already accept fiscal policy, you see them much more positively disposed toward the WPA, CCC, and of course the impact of WWII from a fiscal position. NRA, I think, is usually seen as wrong-headed at best and counter-productive at worst.

      But I'll have to check out what Eggertsson has to say. Maybe I'm being naive.

  2. I think what you say about the NRA may be right. I need to study it more. I understand that Keynes levied some pretty strong crticism of it as the wrong way to raise prices. You want to increae demand rather than cut output.

    However here is Eggertsson

    It was called "Was the New Deal Contractionary?" and he argues no.

    Your right that SS and the minimum wage is not the focus of what we're discussing.

    "Can government policies that increase the monopoly power of firms and the militancy of
    unions increase output? This paper studies this question in a dynamic general equilibrium model
    with nominal frictions and shows that these policies are expansionary when certain “emergency"
    conditions apply. I argue that these "emergency" conditions were satisfied during the Great
    Depression in the United States. This implies that the notorious National Industrial Recovery
    Act (NIRA), a policy installed by Franklin Delano Roosevelt in 1933 as part of the New Deal,
    was expansionary. This conclusion is contrary to the one reached by Cole and Ohanian (2004)
    that argue that the New Deal was contractionary. Unlike Cole and Ohanian I assume nominal
    fricitions, deflationary shocks and a zero bound on the short-term nominal interest rate that
    prevents the central bank from being able to accomodate the deflationary shocks."

  3. He does by his own admission for simplicity rather conflate the NRA with the New Deal

  4. Sorry but I got to quote this line for you from eggertsson who says:

    "Can government policies that reduce the natural level of output increase actual output? For
    example, can facilitating monopoly pricing of firms, increasing the bargaining power of workers’
    unions or, even more exotically, burning production such as pigs, corn or cattle, increase output?
    Most economists would find the mere question absurd. In this paper, however, I show that the
    answer is yes under the special “emergency" conditions that occur when the short-term nominal
    interest rate is zero and there is excessive deflation. Furthermore, I argue that these special
    “emergency" conditions were satisfied during the Great Depression in the United States."

    So he is saying that NRA specifcally wasn't the disater almost all economists think it was.


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