Saturday, December 8, 2012

What I think is wrong with John Papola's take on the world

John seems confused so I want to clarify.

After quoting Keynes on the impact of various marginal propensities to consume (which is a different issue from the share of output consumed anyway), he writes: "This sounds EXACTLY like every fallacious repetition that policies which direct money to those who spend every nickel will be better for the economy."

No, the fallacy is saying that directing money to those who spend every nickel can't growth the economy. It can. I am not denying that. I am not saying that when some Keynesians say things like that they're wrong. It's not a fallacy at all. It's right. For one thing, you are simply raising consumption levels and if we're in a situation (like we are now) where that isn't crowding out others resources that won't substantially reduce consumption or investment anywhere else and it may even spur some investment if producers think it's likely to continue (say, through a permanent low income tax cut or credit). But aside from the simple point that consumption is increasing, you're going to have a lower marginal propensity to consume which is going to make any investment or government demand more effective.

There is nothing fallacious about this. The fact that John treats this as a fallacy is a problem.

So what about all my discussion of Keynesianism and the importance of thinking about investment? That point is simply that Keynes saw the problem of recessions as primarily emerging as a result of problems with investment, citing the instability of financial markets as a likely spark. This is an area where I actually noted that John did OK in the video, because he did not put the consumption talk in Keynes's mouth - he put it in Malthus's mouth (Malthus can be fairly described as an underconsumptionist - you can call it a fallacy I suppose, but I prefer to call it a good step towards the ultimate solution of a broader demand-side theory).

So there's nothing wrong about saying that giving people money to spend will improve growth at all. My response to people like that is (and has been) that it makes more sense to fix what's broken than try and work through something else that's not fundamentally broken. I do support consumption-oriented policies like extended unemployment insurance benefits, though. Why? Mostly humanitarian reasons, not because I think we should pull ourselves out of this through consumption expenditures.

Is that clear?

I really don't think the public is under the impression that weak consumption caused the recession. They know housing values fell. They know that was somehow related to the collapse of the financial system. They might not get farther than that but you don't see people talking in terms of secular stagnant consumption like they did in the Depression. That's a very good thing.

What is the message you get from these videos?

1. That Say's Law is the right way to think about the economy and Malthus's work on gluts is the wrong way.
2. That Hayek is the antidote to Keynes rather than an important complement to Keynes (this is the whole point of the videos - the point is not teach people about Hayek and Keynes it's to displace Keynes with Hayek).
3. That we don't need fiscal or monetary stimulus.

I'm sorry, but with those three major themes running through all of these videos, I can't honestly claim that people will be better educated about or have a better position on economics after watching them.

As I've said in the past - John ought to make a video about how we need NGDP targeting (he could even reintroduce Keynes with his line "get spending flowing" - that was one of Ryan Murphy's favorite parts of the last video).

16 comments:

  1. "That Hayek is the antidote to Keynes rather than an important complement to Keynes (this is the whole point..."

    The fact that Hayek recanted his liquidationism - and endorsed some kind of limited fiscal stimulus - is apparently unknown to John Papola and co.

    http://socialdemocracy21stcentury.blogspot.com/2011/09/did-hayek-advocate-public-works-in.html

    As is the fact that Hayek later agreed with Friedman on the need for monetary intervention.

    http://socialdemocracy21stcentury.blogspot.com/2011/08/hayek-on-monetary-stabilisation-in.html

    http://socialdemocracy21stcentury.blogspot.com/2011/01/hayek-on-secondary-deflation.html

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  2. Lord Keynes,

    Hayek's view on the need for stability of nominal spending (stabilizing "MV") goes back to prices and production (I believe), published before the general theory. I've known this for years and included in in the video that accompanied Fear the Boom and Bust in an interview with Larry White. As to Hayek's quote about public works, I disagree with him. Better to give people new money for the purposes of stabilizing nominal spending and ask nothing of them for public works than to waste their time on a boondoggle when they could be doing something truly value-added. But no matter, because Hayek would surely object to the above-market-wage unionized public works projects that actually happen in real life.

    Also, I see to recall that we can have rapid NGDP growth and inflation even with high unemployment, so I don't see why any talk of fiscal stimulus is necessary. Demand-side issues are solely the purview of the central bank (so long as we have one).

    Daniel,
    I've replied to this, in effect, in other places on your blog. Including here:
    http://factsandotherstubbornthings.blogspot.com/2012/12/pick-up-book-kids.html?showComment=1354975832212#c5831296223247208979

    Using stuff up doesn't grow the economy. That's what consumption is. It's using stuff up. Destroying value. Growth is about ADDING value. Yes, moving someone from unemployed to employed will definitely increase real growth provided they are adding value for society in their production and not engaged in net-value-destroying activities like ethanol or new weapons production.

    I care about people need as much as anyone. Telling people not to save because it's a paradox of thrift doesn't do that. It makes them more vulnerable to the uncertainties of the world, especially in the aftermath of a big bust.

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    1. I consume because I find the activity valuable.

      I don't find sitting around and not consuming anything valuable for me.

      So clearly this idea that consumption destroys value is wrong. There is a trade-off between enjoying value today and creating value tomorrow. Is that what you mean? If that's the case then I agree with you but I don't think it's something that anyone disagrees with you on.

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    2. By the way - someone has to sit around and enjoy (NOT destroy) value from consumption otherwise nobody would be producing anything for anybody.

      Apple would not be producing things if consuming Apple products was destroying value, as you suggest here. It is able to produce and sell products because the consumption of those products is considered valuable by people.

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    3. Jobs and Wozniak produced the Apple II at a time when there was no consumer demand for personal computers, Daniel. They produced first. The consumption came later.

      And yes, consumption is an act of using things up. When I buy a pizza, that exchange price sets the economic value. Then I eat it. It's gone. The world has one fewer pizza. If you want economic growth, it would be better to lend the Pizza shop money so he can buy a high-efficiency oven. Could he finance that purchase through the profits of current sales? Sure. But guess what, that's simply him using his OWN savings instead of a creditor's since the profit is his income.

      Consumption uses up value. It destroys it. Production creates value. Yes, consumption is the point. I'm not saying consumption is "bad". I'm saying we don't have to worry about it at all and certainly not encourage it.

      For example, I've heard many keynesian economists, including our treasury secretary, claim that what China "needs" is more consumption to somehow "balance" their economy. This is nonsense. We don't need to worry about Chinese consumption. The chinese surely wish to consume more than they do today. And if they don't... that's not a problem. It's a preference.

      Now, if people would like to consume but they're hoarding cash because they're scared about the future, the solution is not to have someone else "spend for them". Who but them personally can know what they would buy if they weren't scared, and the structure of production which should orient around delivering those goods and services for them?

      It's to increase the supply of money such that it satiates their demand to hold it without reducing nominal income as a whole.

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    4. "Hayek's view on the need for stability of nominal spending (stabilizing "MV") goes back to prices and production (I believe), published before the general theory"

      No, it does not. Point out to me where in Prices and Production Hayek talks about the need to stabilise spending/money supply. You won't find it there, because in Prices and Production Hayek advocated liquidationism.

      "Better to give people new money for the purposes of stabilizing nominal spending and ask nothing of them for public works than to waste their time on a boondoggle when they could be doing something truly value-added."

      You mean give people money to spend on consumption spending?! But wait: isn't that just "using stuff up. Destroying value"?

      "Using stuff up doesn't grow the economy."

      Did you even think about this statement before making it?

      You mean businesses using up factor inputs to make consumer goods does not grow the economy? Other businesses using up factor inputs to make capital goods does not grow the economy?

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    5. I wrote (I believe) because I'm recalling this from my conversations with Larry White about Hayek's policy norm. "Liquidationism" isn't an economic model, it's an emotionally charged criticism designed to sway people through fear tactics. Are we really to believe that businesses should never liquidate even if they're not adding value? I don't get it. It's just a Delong-esc slam.

      And no, I'm clearly not criticizing investment in productivity-enhancing labor and capital goods, Lord Keynes. That is crystal clear from me comment here: "If you want economic growth, it would be better to lend the Pizza shop money so he can buy a high-efficiency oven."

      But you knew that, surely. My criticism of "using stuff up" as a path to growth is focused entirely and singularly on "consumer" spending. I made that crystal clear here: "And yes, consumption is an act of using things up. When I buy a pizza, that exchange price sets the economic value. Then I eat it. It's gone. The world has one fewer pizza."

      If you wish to explore the ideas and push back on me, great. I love that. But trying to misrepresent and spin what is clearly in black and white for all to see isn't a great strategy for engagement. It is, however, in keeping with your chosen nickname.

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    6. (1) I assume you're not disputing my points: Hayek changed his mind on intervention in a depression; and Prices and Production advocates liquidationism.

      (2) "Are we really to believe that businesses should never liquidate even if they're not adding value?."

      You have set up a straw man here.
      Businesses come and go all the time in an economy with an expanding real output. Yes, that isn't a problem.

      The problem is mass collapse of business in a severe recession/depression.

      (3) "My criticism of "using stuff up" as a path to growth is focused entirely and singularly on "consumer" spending.

      OK, I misrepresented your view. I was wrong. I apologise.

      Nevertheless, Keynesianism isn't just focused on consumer spending: it is about stabilising and increasing private investment too.

      In your crude opposition to Keynesianism (or a caricature of it) all you're driven to is the absurdity of denying that aggregate demand drives investment and output.

      If a surge in demand for products does not signal to producers that they need to hire more workers and produce more goods (= increase private investment), then tell me: how does the law of demand even work? How does capitalism even work at all?

      In any case, you've already advocated "stabilizing nominal spending" here:

      "Better to give people new money for the purposes of stabilizing nominal spending and ask nothing of them for public works than to waste their time on a boondoggle when they could be doing something truly value-added."

      Since many of these people would be spending the new money on consumption, I ask you: why are you advocating this at all, if you really think that consumption is nothing but "using stuff up. Destroying value"?

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    7. You presume to know what people will do when their demand for money is satiated. Why? The reasons a collapse of nominal spending matters is money illusion, debt-deflation and sticky wages. But once we've got nominal stability, actual REAL GROWTH will depend on whether people save more and provide real capital for productivity-enhancing investment in capital goods, R&D, etc. If they use it to buy consumer goods, that is, again, "using up" what was already produced.

      So my video stands. If you want growth, save more today.

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    8. "So my video stands. If you want growth, save more today."

      John, don't you mean invest more today. You're presuming people saving more lowers the interest rate thereby increasing investment? But interest rates are at zero and investment is almost back to normal levels.

      Again, if you want NGDP targeting, that's fine, but if you have something else in mind here, Lord Keynes is probably right that you're advocating liquidationism.

      If you want policies that promote higher normal levels of savings and investment, that's fine too, but I think you're confused about the trade off between consumption and savings. Increased consumption may put money into the hands of people more likely to invest and give them a reason to invest.

      I'm not sure what your point about Jobs and Woz is supposed to be. Perhaps everyone in a depression will take to their garage to invent something? Like John Galt's magic engine? Did people not buy things like typewriters and Ataris before that?

      I also believe a significant amount of Apple IIs were sold to public schools.

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  3. Last sentences was supposed to be "The solution for hoard it so increase..."

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  4. "So there's nothing wrong about saying that giving people money to spend will improve growth at all. "
    Indeed.

    "My response to people like that is (and has been) that it makes more sense to fix what's broken than try and work through something else that's not fundamentally broken."
    Sounds great, but HOW?

    And I mean, a detailed political program for how. We've found that the banking system is completely criminogenic (Bill Black); all the major banks are run by people who are habitually criminal. In attempting to fix the criminal banking system, we've found that the Department of Justice, SEC, and many state regulators and judges are helping the crooks cover up their crimes! In attempting to fix that, we've discovered that the power structures of both major political parties are in on the crimes! Then we run into what we already knew, which is that our gerrymandered, archaic election system makes it very hard to reform the existing parties and very hard to get new parties into power.

    Fixing what's broken - the criminal banking system -- may be impossible short of revolution!

    Working through something which isn't broken, on the other hand, may be fairly easy!

    Think about that!

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  5. Daniel,

    Since you've already said that my depictions of Malthus and Keynes aren't problematic, I'm failing to see where you actually have a problem. Yes, I advocate savings as the key to real growth. Are you actually disputing that long-run real growth requires savings and investment?

    Hell, didn't Paul Samuelson argue that the USSR had a faster growth rate because of their forced higher savings rate? Why is this even controversial?!?

    Moreover, I'm not even criticizing Keynesian economists for their focus on consumption (which is an indisputable fact in the public discourse). I'm criticizing "pundits and politicians". That's the script. That's the video. What's the problem, exactly?

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    1. re: "Since you've already said that my depictions of Malthus and Keynes aren't problematic, I'm failing to see where you actually have a problem."

      The whole premise of the video is that demand side stories are wrong, is it not?!?

      You did not put the consumptionism language in Keynes's mouth, that is true. But I doubt people are going to walk away with anything other than the idea that Keynes was a consumptionist. Mankiw didn't think it was fair to Keynesianism - did you catch that post? But you can always note that you never made Keynes a consumptionist.

      The bigger problem is that you presented demand-side stories as fallacies. That is a major problem.

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    2. I was very VERY explicit about what was a fallacy: that consumer spending can grow the economy. That's not calling all "demand-side stories" a fallacy by any stretch. It's calling underconsumptionism a fallacy... and it is... and there is a tragic amount of underconsumptionist-sounding rhetoric at all times being asserted by Keynesian economists and pundits. So if anyone is guilty of conflating Keynesianism with underconsumption, it's people like Paul Krugman and everyone that's ever noted how important consumer spending is for the economy "because consumer spending is 70% of GDP".

      But that nonsense isn't the totality of "demand-side stories". I view the "demand side" as the nominal/monetary story. As sumner explains, NGDP (or AD as he calls it often) is controlled by monetary policy. So there IS a demand-side story which I've written about repeatedly and included in my video content from the beginning: nominal spending stability via monetary policy.

      And correct me if I'm wrong but isn't the Keynesian framework first and foremost about restoring a full-employment equilibrium and NOT long-run growth? I was EXPLICIT that I was talking about GROWTH. Growth is driven by increased productivity and efficiency that leads to more valuable output per person. My understanding of the economics world after Keynes is that short-run fluctuations became the domain of Keynesian demand-management (for Keynesians) while long-run growth was about supply-side structural issues including the savings rate and rate of capital accumulation. Am I getting that wrong?

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    3. John, Krugman has said that there is no reason you can't implement supply side changes at the same time as demand side management, but that the problem is the supply side changes won't be enough.

      For your criticism to make sense you'd have to explain why it's better to have the economy not produce as much as it's capable of.

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