Monday, December 10, 2012

Robert Reich and consumptionism

Paul Krugman once said of Robert Reich: “talented writer, too bad he never gets anything right.”

We can add to the list of Reich's problems a strong focus on a consumptionist argument as opposed to identifying the problem in a shock to liquidity preference and a decline in investment following a financial crisis. John Papola shares two examples of consumptionism from Robert Reich: here at the Huffington Post and here on This Week. He presents the usual arguments: it's a big part of GDP, median wages are stagnating, etc.

Let's review what's OK about consumptionists. First, they're on the demand side of things. They are not the bad old version of Jean Baptiste Say. That is a good thing. Insofar as that's the case their policy agitations are probably not going to be as harmful. Second, they're of course right that increasing consumption will help output. And finally, they're right that as a consequence of falling output consumption has fallen (consumption is a function of income, after all).

The problem comes in diagnosing the initial problem (which as Keynesians point out has much more to do with investment, the fragility of financial markets and demand for liquidity), and in proposing the solution (which ought to solve the initial problem).

35 comments:

  1. Daniel, it seems to me you create the wrong word picture when you refer to "a decline in investment" in connection with financial markets.

    I would submit for consideration that it would be best to talk about a decline in the willingness to make future promises (which includes both borrowing and other contracts involving future risk).

    I look at why Krugman doesn't gain traction and keep concluding it is because he is so openly advocating substitution of Gov't money for future promises, never explaining how or when we will transition back to an economy based on future promises which (before robotics) was agreed to be the normal state.

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    1. So I may be misunderstanding your point about "future promises", but I'm using "investment" as economists do - capital equipment and in this day and age basically any non-human factors of production. Financial markets are going to impact firms' ability to invest and they're going to impact firms' desire to invest, but I'm not thinking of "investment" in personal finance sense.

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    2. Daniel,

      It seems to me that investment--capital equipment--does not describe the problem with the best word picture for explaining what has happened, albeit a willingness to purchase capital equipment(or non-human factors) does say something about future expectations. The reason is that you could buy these with cash, not borrowing. I realize we have lots of corporate cash on the sidelines but it is in banks, so it is available for us by someone. The point is that no one wants to borrow, to make a future promise to repay the loan.

      When I talk about future promises, I am referring to making a contract to be performed and enforced in the future. This covers,most importantly, loans, but it also covers other contracts subject to the future (I will work on your case, bill you at the end of the month, and expect payment in 30 days thereafter).

      What the Lesser Depression did was drastically alter the willingness of all to make future promises (or to accept them).

      Moreover, the rate of interest (as pointed out recently by Buffett) does not significantly affect the willingness of people who know what they are doing to invest cash.

      However the rate of interest has a significant effect on future promises because the cost goes up or down, etc. This is why the zero bound is significant. Interest rates no longer can have any impact on the decision to make a future promise.

      With regard to financial markets, they become involved with investment only to the extent that those doing the investment are doing such by loans(borrowing money) and making future promises to repay such. (The stock market has almost no role in investment, for there are not many stock issues made for the purpose of paying for capital equipment).

      Krugman is the advocate of Keynesian gov't spending as a substitute for people making future promises. Keynes asserted the substitution could be completely imperfect (paying people to dig and re-fill holes, as I recall). Having a more optimistic view of our ability to adapt, I tend to agree. However, by not explaining how one stops substituting and returns to normal---well I understand why Krugman meets resistance.

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  2. I don't see anything obviously wrong with the Huffington Post piece.

    Reich is saying we need higher incomes to consume more not that we should lower savings. John wants to explain away consumption, but we could just as well do the same for investment. If we give money to households and they buy "toys" are toy companies going cut back investment? Might they increase investments? (He possibly has in mind the government paying people to build toys and crowding out labor or something.)

    If we ever get back to full employment and balanced trade then maybe income and savings will rise. (Although, he seems to be against doing anything about the trade deficit, but maybe I don't understand his position on China.)

    If he can explain why households consuming more, even at the zero lower bound, will lower investment, that might be helpful.

    (By the way he praises China when China had a huge fiscal stimulus? He's against balanced trade and for supply side economics but against the great moderation and for the postwar Keynesian era but doesn't like Keynesian economics? He's for more aggressive monetary policy but absent that rather do nothing than use fiscal policy? He doesn't know of one instance of fiscal policy working?)


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  3. Thanks for posting this. Reich is not an aberration by any stretch either. He's just an especially crude exemplar of Keynes-inspired consumptionism. This type of rhetoric is pervasive.

    Alas, with this post I think you've cleared things up for me. I absolutely disagree with your point of view and my video is unequivocally aimed at challenging it with regard to the role of consumption in recovery and macro in general. You're celebrating as correct the very assertions which I believe to be false from Reich. The entire point of including Keynes and having his lyrics written in the way they are is to draw attention to the notion of consumption as a solution. I've been attacked because Keynes said investment was the problem, but that was never in question. I'm attacking consumption as the solution.

    "Second, they're of course right that increasing consumption will help output."

    Wrong. Consumption doesn't increase output. It uses it up. The very statement that consumption increases output is, shocking to me. That's what consumption is. The only way I can understand that we're at such cross-purposes in our dialog is the issues surrounding aggregation endemic in a Keynesian spending-centric approach vs. what Arnold Kling refers to as a PSST approach.

    We don't need a reason to consume. It can be assumed.

    This post, for better or worse Daniel, only further reinforces for me that the grounds on which you attack Say's law are rooted in a deeply different understanding of the nature of economic relations compared with the classical view.

    When has there every been a case where we've run out of need in the world? I've never heard of such an event. And when we get there, when all our wants are fulfilled, this will not be a problem, it will be nirvana. The framework implicit here is that we should all be thankful that people consume because without it we'd have nothing to do. But we are all producers. If everyone ceased needing consumption, producers would cease needing it too and thus would have no reason to produce for themselves.

    We are all producers. We produce so that we can consume. We do NOT consume so that we may produce.

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    1. John seems to forget that we need people to consume so that we get paid. It matters not whit what anyone produces, if no one has the means, methods, or confidence to buy such.

      Idle resources are going to be put to work only if there is a reasonable expectation of being paid. Payment can be either cash or with a future promise. Right now, people will do neither.

      Our economics has presented us with a choice. 1. Do nothing. 2. Have the gov't, by any number of methods or combination of methods, start paying for what people will not pay for themselves or pay for other things as a substitution for what people will not pay for themselves.

      The expectation about the later course is that eventually confidence will be restored and the baton handed back.

      What John does not understand is that the metaphor for economics is golf. It is a game of confidence, played on a six inch course between the ears.

      The missing element is confidence. Keynes hit the nail right on the head. In an economy based on finance (lending), only the gov't can provide an environment in which the average business person can regain his or her willingness to make or accept future promises optimally.

      To put it simply, how does his view restore confidence? How does his view increase the willingness of firms to make or accept future promises?

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    2. Wrong. We need other people to produce things that we want. Money is the medium of exchange. The "consumer" is a producer first. That's how they have something of value to offer in exchange for what we produce. Consumption is the motivating end for us all, but it's never the means. Production and exchange is the whole story (with the caveat of monetary equilibrium).

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    3. John, try talking about the real world rather than an island barter economy with ten people. In the real world how are businesses deciding not to produce or invest based on a rise in consumer spending? How is your model working?

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    4. "We are all producers. We produce so that we can consume. We do NOT consume so that we may produce."

      Who is saying "we consume so that we may produce"? We're talking about the economics, not some underlying thing.

      The argument is that higher consumption in the short term, in a particular situation, will be good. This is similar to the idea that higher inflation in the short term is good. Too much inflation is bad, just like too much consumption would be bad.

      Doesn't Arnold Kling think the recession is structural? Why do you guys want more monetary policy if the recession is structural? The best I can tell he wants to hedge his bets or use monetary policy as a wedge against using fiscal policy.

      The idea is to get back to full employment output. If you think we're at full employment output it seems we're having the wrong debate and really are talking past one another.

      If you're making some other argument please say so.

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    5. John,

      One could easily flip your comment on its head. Watch me:

      1. We need other people to consume things that we want.
      2. The "producer" is a consumer first.
      3. That's how they have something to produce what we will then consume.

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    6. John

      Last chance to correct yourself. You write, "The "consumer" is a producer first."

      Not true. I can buy today, promise to pay next month, and plan on working next week, all without ever having produced anything, ever.

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    7. John

      Last chance to correct yourself. You write, "The "consumer" is a producer first."

      Not true. I can buy today, promise to pay next month, and plan on working next week, all without ever having produced anything, ever.

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    8. John D...

      Your promise to pay is predicated on your ability to earn income through some value-adding activity. Moreover, the money you borrow was income generated by someone else who already produced value for others. I stand by it.

      This IS economics in the real world. In the real world, "output" is actual goods and services and "consumption" is the using up of those goods and services. What is measured as "spending" is trade between producers. Each person's "demand" is constituted by the value they or someone else has already contributed to the market.

      What makes "demand" a loose joint from supply is money. It doesn't change the facts, it just abstracts them. So one can, through monetary expansion, create "demand" out of this air without first increasing supply. But the result of this will tend to be inflationary unless there is an excess demand for money. Hence I have always caveated that Say's law requires monetary equilibrium. That equilibrium does NOT suggest that consumption is important or can grow the economy or increase output. And, from an employment standpoint, we've already seen quite clearly that excess demand can occur, producing inflation even with unemployment. High inflation and high unemployment has happened all around the world at different times. The "slack capacity" and "output gap" talk masks the structural issues that make stagflation possible because of excessive aggregation. It's that same failure to dig in and distinguish between resource consumption that increases productivity and final goods consumption that uses up output for personal satisfaction that is clearly at the heart of this "consumption drives the economy" fallacy. And, yes, it is a fallacy.

      What is NOT economics is claiming that "consumption increases output". That is utterly contradictory nonsense.

      I have to step away from the debate for now, since I actually do run a real small business and unless we produce, we can't consume a damn thing. Nobody needs to encourage me to consume. My body demands that I eat, sleep, go to the doctor when I'm sick. My family needs a roof over their head. My son needs to go to school. There isn't a single policy that should be put in place that encourages consumption. Not one. Zero. Never. Ever.

      "Demand-side" issues are all about monetary policy. The level of aggregate demand is a monetary phenomena. The fact that Keynesians so deeply misunderstand what's happening in the actual real world of exchange by fixating on nominal spending is what has clearly, perhaps fatally, damaged our understanding about the way the world works. My videos are aimed at restoring that understanding, because it's clearly been lost.

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    9. What debate? You keep repeating yourself. You've yet to explain how increased consumption at the zero lower bound will harm the economy other than that you'd prefer we use monetary policy instead. Not that you will make a commitment on whether we even need monetary policy now.

      Reich is talking about consumers not being able to spend more because their incomes are not going up. Talking about your body telling you things has nothing to do with it. He's saying productivity gains have not gone to labor, so labor can't buy as much as they can produce.

      If you can please explain why we should produce less than we can or how you can raise investment and productivity this way.

      The claim that Keynesians are not aware of stagflation is just bizarre.

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    10. John D.

      You really refuse to admit how really wrong you are.

      I didn't borrow any money. Let's say I bought a loaf of bread. It may have been entirely paid for by money lent by a bank that didn't come from anyone. Or, everyone along the way may have just accepted a future promise. The framer may have saved some seed. He planted such. Havested such. Took it to a grain dealer who said, I'll pay you when I get paid.

      You need no savings whatsover, none, if instead people will accept and exchange promises of future performance. Enough

      There is no debate with you. Your are so wrong, what does Noah say, "You're not even wrong."

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    11. "Wrong. Consumption doesn't increase output. It uses it up. The very statement that consumption increases output is, shocking to me. "

      What John is saying is that a surge in demand for products does not induce an increase in output of that product by producers seeking to make more profits.

      He is saying that capitalism does not work.

      That is quite an admission!

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  4. "Not true. I can buy today, promise to pay next month, and plan on working next week, all without ever having produced anything, ever."

    What are you going to buy that hasn't already been produced?

    He is not talking about a specific person when he uses the word "consumer"! Sure, it is possible for one specific person to consume without producing, but it is not possible for consumers in general to consume without producing.

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    1. Right. And it's not even possible for that consumer to buy without someone ELSE producing, unless they got the money printed for them. After all, if they borrowed the money, it came from someone else's savings which was earned by producing value.

      Commodities are paid for with other commodities.

      Economists hasn't advanced since John Stuart Mill. It's clearly been retarded in deep and disturbing ways by the Keynesian confusion of monetary phenomena with real trade and exchange patterns.

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    2. John, it will help if you could talk about the real world. In the real world we have banks, which can lend out more money than they "earned by producing value".

      It seems you're not interested in a debate, but merely want to lecture and moralize.

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    3. The real world exists outside of the banking system. The real world is made up of real resources. The banks don't create 1 iota of real resources. Banks play a very important supporting role in the real world. Lending by in and of itself is useless - it is useful only for consuming and investing in real resources. People don't eat money, people don't protect themselves from the elements with money, people don't get entertained by money. They need to exchange money for real commodities or services! Plain simple.

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    4. sandr, I don't know what your point is. You don't seem to disagree with me about banks.

      Elsewhere, though, I've been talking about the current situation and whether Keynesian fiscal policy generally and in this thread consumption will help.

      But you and John are beating up on straw men talking about we can't consume what we haven't produced. (Try telling that to Nick Rowe, though, when he starts talking about Apples traveling through time.) John seems to believe the opposite though, that we shouldn't consume what we can produce.

      The issue is John making a video saying people Say's Law is true in the real world because it's true in a barter economy on an island in his head. And this is okay because he edited out the part of the video that supposedly makes it clear that it's not really true.

      And the reason why he had to make the video? Because some Keynesians talk about consumption helping the economy and this is a fallacy either 1) for some mysterious reason he won't say, 2) because Say's Law is true in a barter economy on an island in his head, or 3) he'd prefer more monetary policy and if he can't get his way he rather do nothing but won't say why(that is assuming he's was even sincere in implying he wanted more monetary policy to begin with).

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    5. John seems to believe the opposite though, that we shouldn't consume what we can produce.

      Strawman alert!

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    6. The issue is John making a video saying people Say's Law is true in the real world because it's true in a barter economy on an island in his head.

      You either completely misunderstand or you just want to have fun destroying strawmen. For some mysterious reason related to banking, Say's law doesn't work in your non-barter economy.

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    7. John seems to believe the opposite though, that we shouldn't consume what we can produce.

      Strawman alert!


      sandr, notice I said "seems to", I've tried asking John about his views several times. I don't know why you feel qualified to speak on his behalf, though.

      For some mysterious reason related to banking, Say's law doesn't work in your non-barter economy.

      1. This isn't something I said. (Remember I was responding to John's characterization of borrowed money, you still haven't indicated you disagree with my response in any way.)

      2. John himself doesn't believe Say's Law is true.

      What am I misunderstanding.

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    8. "John seems to believe the opposite though, that we shouldn't consume what we can produce."

      I have no idea how you arrived at this conclusion. None. It's totally unrelated to anything I've ever written or said.

      It's not the job of economic analysis to say what individuals "should" or "shouldn't" do. People will consume what they wish to consume and have the means to consume at the price they deem worth paying. But they only have the means to consume because they've either produced something for their own consumption or produced something for someone else and traded it for what they want or the money to buy what they want to consume.

      Consumption can and should be both assumed and ignored. Our real incomes are the result of effective production. The question we must always be asking is "are we producing the right stuff?".

      The fact that these simple insights are hard, and that many on this blog seem to talk about saving without even realizing they're talking about saving, only underscores for me how deeply destructive the Keynesian framework is for understanding foundational economic mechanisms. It's not merely that production and exchange are relegated to "micro". No, they've been totally ruined. Consumption increases output, rather than using it up. I clearly have my work cut out for me with the next set of videos.

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    9. John, you wrote this:

      It's not the job of economic analysis to say what individuals "should" or "shouldn't" do.

      Then this:

      Consumption can and should be both assumed and ignored.

      And this:

      I have no idea how you arrived at this conclusion. None. It's totally unrelated to anything I've ever written or said.

      Really?

      John, people are saying an increase in consumption, in a particular situation, can lead to more hiring and investment raising income, helping a depressed economy with excess capacity. (Or at least preventing more firing and even lower investment. Read Noah Smith or Nick Rowe on Milton Friedman's thermostat.) And you keep responding like they're saying consumption by itself raises output by repeating some mantra.

      Also, again, no one is saying we can consume something we haven't produced. (Except maybe Nick Rowe.) But you keep repeating something that sounds suspiciously like the money speech from the Fountainhead.

      Is it possible that prices are sticky and that the government by borrowing money and giving it to some people with a high propensity to consume, those people will be able to successfully consume, at least for a time, without their having been an exact accounting of whether or not they've produced an exactly proportional "value" of what they wish to consume? If you think this is possible, the question is what happens when in a particular situation, this is done? Does it raise or lower income and unemployment? And if so why? What mechanism does it do this?

      The question we must always be asking is "are we producing the right stuff?".

      Huh? Your video, and based on what you were saying earlier indicated that you believe what's important is increasing savings because you possibly believe this leads to more investment, even at the zero lower bound, in a depression. I've been trying to figure out why you think this is so. And why increasing consumption instead would necessarily be bad.

      But if you want to redefine saving to mean the same thing as investment rather than an accounting identity, because what people normally understand to be saving is really "money hoarding", and that Say's Law is true, even though it's also not true, because of money, then I don't know why you're surprised people are confused.

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    10. I may have been thinking of the courtroom speech from the Fountainhead, the money speech is from Atlas Shrugged.

      John, basically people are talking about depression economics and you keep wanting to have a moral debate about the alleged materialist foundations of capitalism or something.

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    11. There's a BIG difference between statement #1, which is saying that economics doesn't advocate what INDIVIDUALS should and should not do, and statement #2, which is saying what ECONOMISTS should and should not be IGNORING in their analysis. I'm not sure why that's hard to distinguish.

      It was Daniel who in the post wrote that consumptionist solutions "increase output". Consumption uses up output, so, recession or not, this statement is false. The set of assumptions and qualifications needed to make this statement true render it so unlikely and so near-impossible that it's ridiculous to defend as a popular policy prescription, and it is VERY popular among Keynesians, as I have demonstrated. Daniel himself is agreeing to it.

      Hoarding of exchange media should be resolved with satiating that demand through increased supply. Period. Consumption can and should be safely ignored BY ECONOMISTS AND POLICY MAKERS. Any notion of increasing real growth must be rooting in the mechanisms which increase productivity.

      Look, I've spilled plenty of ink explaining my perspective here. Take it or leave it at this point. In the next week, I'm going to write up a piece that consolidates my efforts here and elsewhere into a carefully edited post on EconStories.tv. This debate has been helpful for me, if nothing else, in re-inforcing that the differences in analysis are quite deep and stark. We all, I assume, want to make the world a better place. Our mental models for how we get there are clearly different.

      PS. I've never read any Ayn Rand.

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    12. John, you made a video telling people idea that their consumption could help the economy is a fallacy. And suggesting that if they don't buy their kids toys they can help the economy. They might even think buying their kids toys will hurt the economy.

      I'm afraid I fell into a trap, though. The Keyensians in this debate haven't been talking about what we should individually do either. They're talking about what people can or will do and how it will affect the economy.

      You're ducking the issue though by using monetary policy as a shield. Not that you've been willing to elaborate on your views on monetary policy either.

      But if you believe there is excess capacity and the government could increase consumption then by logic you must believe we shouldn't consume what we can produce. I don't see any way around this. Equivocating about policy vs. individuals won't help you.

      It was Daniel who in the post wrote that consumptionist solutions "increase output". Consumption uses up output, so, recession or not, this statement is false.

      Daniel's talking about a mechanism. You're saying a tautology, that "consumption is consumption." Duh.

      Any notion of increasing real growth must be rooting in the mechanisms which increase productivity.

      Any notion of increasing productivity must be rooting in the mechanism which increase productivity?

      Hoarding of exchange media should be resolved with satiating that demand through increased supply.

      And Keynesians are arguing that this can be achieved by increasing consumption.

      I think you should read that courtroom speech. You seem to have a similar view of the economy. But metaphysical foundations of barter economies and tautological incantations isn't economics. I think what you really want to make is a moral argument.

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    13. Sorry, I guess on economic growth you might be distinguishing between capital accumulation and productivity gains and perhaps suggesting increased consumption will only result in more of the former but not the latter.

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    14. you made a video telling people idea that their consumption could help the economy is a fallacy. And suggesting that if they don't buy their kids toys they can help the economy. They might even think buying their kids toys will hurt the economy.


      I have watched all the videos posted on econstories.tv's youtube channel. I am yet to watch a video that you described there.

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    15. I am yet to watch a video that you described there.

      Okay? What did I say that was wrong? We're talking about the Macro Follies video.

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    16. "And suggesting that if they don't buy their kids toys they can help the economy. They might even think buying their kids toys will hurt the economy."

      He definitely didn't make anything to suggest the above. Not in the video, and against clarified in the comments that Consumption should be taken taken as a given. Economists should leave consumption out. You are beating a dead horse.

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    17. sandr, maybe it help if you watch the video and describe for us what you think it's about.

      The last singer Hayek says to grow the economy you have to delay consumption and save because businesses need to borrow that money from you to invest.

      You're right it doesn't say buying toys hurts the economy, but it does say it's a fallacy that it can help, so someone might think that it could hurt.

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  5. My respect for Paul Krugman just shot up. I would not have expected him to call out someone like Robert Reich.

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