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John Papola writes: "To illustrate the point, isn't it the case that in most recessions, profits and business investment collapse first, only followed by consumer spending's fall and then profits and business investment recovery first, only followed by consumer spending. Isn't that exactly what's happened in this recession?"
And then shows that it is the case, as we all know I hope.
Hard to know what to make of this except to say "right - what did you think we all thought?"
He then gets at what he thinks we thought: "How do you account for this if consumption drives growth in the economy (or is a key to restoring monetary equilibrium) rather than investment and production?"
Well we are confusing a couple points here. First, demand seems to drive short-run fluctuations in the economy (there's no reason supply couldn't - but it makes sense that demand is going to be more volatile). So I account for what John observes in the data by saying that investment is a particularly volatile part of demand - more than consumption - and it's the one that sets these things in motion. That's how I account for it. When were you ever under the impression of a different story?
Now I say he confuses a couple points. I'm referencing the phrase "rather than investment and production". So to me "production" sounds like "supply". Producing something is and then taking it to the market is supply. Investing is going to the market and demanding certain equipment. It's almost as if rather than income/expenditure or demand/supply, John wants a "household/firm" dichotomy of the economy or something like that. Maybe this is possible but my brain doesn't work like that. Households do some demanding and some supplying. Firms do some demanding and some supplying. Anyway I'm lost. I'm not sure what the value of throwing a component of demand in with a component of supply is in explaining the business cycle. But perhaps I'm missing something.
He also seems to be mixing together a lot of thoughts on the long-run and the short-run. Take this: "So decided to focus on the great fallacy of our age: that we can consume our way to a brighter tomorrow. We can't. We have to work, save and invest our way out." I think there's a big difference between saying that demand side solutions like investment and consumption can get us out of short-run problems and saying that they are a "way to a brighter tomorrow" (which has a long-run feel to it for me, but maybe that's not what John intended)
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and then study macro all day
ReplyDeleteTwo hints:
1. There is no such thing as "macro". There is just a bunch of human beings exchanging stuff.
2. There is no such thing as "demand". There is just a bunch of human beings exchanging stuff, each side supplying something and demanding something else in return.
Bingo, Bob.
DeleteDemand is constituted by supply of other things. That's Say's law as I understand it. I have to produce and earn a paycheck before I can demand anything else.
The only demand not constituted by supply is demand driven solely by money creation. I agree and acknowledge that money is a "loose joint" in the coordination of exchange that is our "economy". But I deeply disagree with the approaches put forward by Keynesian economists on how to deal with fluctuations in the demand for money and, perhaps, the causes of it.
It's not possible to start with demand. Demand isn't possible unless you have something to trade. You have to produce (or find) things that other people are willing to exchange for what they have produced or found.
I realize this is very simple. But I also believe it's a crucial foundation for our understanding about what processes drive real growth versus monetary disturbances that complicate that process.
Daniel, I have to step away from family time. I'm going to write a Forbes blog post (and later produce a supporting video) which aims at explaining the point as best I can. I've already shared with you via email my Tiger by the Tail foreword, which touches on a bunch of this. We're clearly talking past each other on some key points and I'd love to understand what those are. We may never agree about our understanding here, but I truly want to understand the nature of disagreement.
It seems to me that your argument is fundamentally flawed when you assert, "Demand isn't possible unless you have something to trade," for you omit why were are all here: future promises/finance.
DeleteMuch if not most all demand, today, is entirely the product of exchange of a current good or service for a future promise. If you let me have a new car, today, I promise to pay you $x on the 1st of each month, for the next 60 months. Money is not the issue. Who is debt free paying all cash for a car?
This is such a truism that couldn't we argue that an economic downturn is any decline in the ability or willingness of participants in the economy to make future promises?
Further, isn't the focus on the rate of interest premised on the assumption that, as interest rates rise, the costs of future promises goes up and people will make fewer future promises?
Further, it seems to me that to talk in these terms is useful (Coase) macro economics. Immediately, the problem is identified. Participants are unwilling to put idle resources to work because, even with cars in the show room, they do not anticipate enough buyers coming into the show room willing to make future promises. Krugman doesn't argue that his spending will spur confidence and get more people to make future promises. He argues such is a substitute, which is why, it seems to me, he doesn't gain traction as he wishes. Krugman might get a better reception if he could better explain the handoff from the substitution back to reliance on future promises being the source of demand.
It seems to me that your argument is fundamentally flawed when you assert, "Demand isn't possible unless you have something to trade," for you omit why were are all here: future promises/finance.
DeleteMuch if not most all demand, today, is entirely the product of exchange of a current good or service for a future promise. If you let me have a new car, today, I promise to pay you $x on the 1st of each month, for the next 60 months. Money is not the issue. Who is debt free paying all cash for a car?
This is such a truism that couldn't we argue that an economic downturn is any decline in the ability or willingness of participants in the economy to make future promises?
Further, isn't the focus on the rate of interest premised on the assumption that, as interest rates rise, the costs of future promises goes up and people will make fewer future promises?
Further, it seems to me that to talk in these terms is useful (Coase) macro economics. Immediately, the problem is identified. Participants are unwilling to put idle resources to work because, even with cars in the show room, they do not anticipate enough buyers coming into the show room willing to make future promises. Krugman doesn't argue that his spending will spur confidence and get more people to make future promises. He argues such is a substitute, which is why, it seems to me, he doesn't gain traction as he wishes. Krugman might get a better reception if he could better explain the handoff from the substitution back to reliance on future promises being the source of demand.
(1) There is no such thing as "macro". There is just a bunch of human beings exchanging stuff.
DeleteIf there is no such thing as "macroeconomics" nor aggregate entities, then Say's law must be invalid.
Macro/aggregate concepts are required by Say's law (e.g., total factor payments considered as aggregate supply and the aggregate of spending from total factor payments on output as aggregate demand being equal).
(2) "There is no such thing as "demand". There is just a bunch of human beings exchanging stuff, each side supplying something and demanding something else in return. "
Two propositions which violate the basic law of logic: the law of non contradiction.
You are both asserting and denying something, that is, saying ~q the q (q = demand exists).
If demand does not exist, Say's law cannot be true, for it asserts that total factor payments considered as aggregate supply constitutes the means to pay for the aggregate of spending from total factor payments on output (aggregate demand).
John@December 8, 2012 12:33 PM
DeleteBingo, Bob.
Demand is constituted by supply of other things. That's Say's law as I understand it. I have to produce and earn a paycheck before I can demand anything else.
Bob Roddis did not merely assert these things: he made the absurd claim that "There is no such thing as 'demand'."
If there is no such thing as 'demand', then your statements presupposing the existence of something called demand must be false!
The emphasis is on the word "THING". There is no such THING as demand. It is a helpful concept when analyzing how much "demand" there might be for finished products. It becomes absurd when too much of the wrong type of products are made than there are people who want to and have the means to buy them. It's absurd when someone says, "The problem is that there isn't enough DEMAND and the government must step in to increase DEMAND.".
DeleteAnd there really is no such THING as "aggregate demand".
(1) "The emphasis is on the word "THING". There is no such THING as demand. It is a helpful concept when analyzing how much "demand" there might be for finished products."
DeleteYet more violation of the law of non contradiction.
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(2) So you're now asserting:
(a) There is no such thing as demand
(b) There is no such thing as aggregate demand.
Say's law:
Total factor payments considered as aggregate supply constitute the means to pay for the aggregate of spending on output (aggregate demand). The two tend to be equal either in the short run or long run (depending on what version of Say's law one wants to use).
Therefore if demand - either just demand or aggregate demand - does not exist, Say's law cannot be true.
Way to disprove your own theory, bob!
Your critique is quite shallow unless you also do not use thermometers (hey, it's just individual molecules and their kinetic energy, right?) and other things made possible by the existence of the aggregate phenomena, Bob.
DeleteOr, sure it is work, which is why recessions are counterproductive, save, meaning quenching the demand for liquidity, and invest, being willing to part with liquidity. The problem with exchange is the unmet demand for money, which people obtain by investing and spending less.
ReplyDeleteIn a world with a central bank, an unmet demand for money can and should be satiated by increased supply of money. No need for resource-using public works, inducements to increase consumption or debt. People wish to hold more money? Print more with an eye on maintaining nominal spending stability.
DeleteAt the zero bound, monetary and fiscal policy look an awful like alike. To increase the money supply requires the central bank to buy something and it has as much influence over the economy as fiscal policy does in spending it. Monetary policy traditionally works by increasing the demand for debt. Fiscal policy can even have less direct influence as a result, but there is ambiguity over monetary and fiscal and bank and legislature since some bank policies approach being fiscal and many legislative policies are monetary.
DeleteBuying something is the traditional way central banks operate. But there isn't much reason why the central bank couldn't do something closer to helicopter drops. You could just have citizens register a bank account with the Fed and whenever the central bank wants to expand monetary policy, they could just hand a bunch of money over to everyone. And yes, it does look a lot like fiscal policy in some ways, but the line between the two is I think poorly policed. Instead of "what Congress does" vs "What the Federal Reserve does" the distinction should probably be whether we are directly impacting monetary aggregates or not. Or maybe we should stop caring about the difference.
DeleteAgree with others John that your conception of monetary policy is simplistic.
DeletePresumably monetary policy works at the zero lower bound by increasing inflation expectations not increasing the supply of money. Presumably the central bank can later decrease the supply of money if it wants by raising rates, reserve requirements or selling off assets. (The government could raise taxes as well.)
Plus currently the central bank is clearly not interested in getting us back to full employment (or possibly unable), but does seem willing to accommodate fiscal actions to reduce unemployment. In that case it's unclear what your problem is with "resource using" public works. If we have idle resources why shouldn't we use them to build roads or broadband internet?
Maybe you think all government spending is wasteful? But that's a different argument.
Please cite the exact quote(s) where I offered Keynesian views that contradict Keynesianism. I don't know what you're referring to.
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