"My team didn't get our way in the crisis. Neither did yours. But your side got a lot closer. Don't you think that the $820 Billion dollar "stimulus" package had more in common with Keynes than Hayek?I had responded: "Right but everything that has happened since the stimulus has been holding federal spending steady and they've all been arguing about how to reduce it - in the middle of a depression. That sounds closer to your response (cut) than mine (grow)."
Alan Blinder is a pretty Keynesian guy. He thought it was about the right size: http://www.npr.org/templates/story/story.php?storyId=100018973 I know--some people wanted a bigger stimulus. But it's a Keynesian stimulus not a Hayekian one. What is Smithian about me is that
I start with what Dan Klein calls a "presumption of liberty." I also have little faith in precise models of human behavior. I believe that good social science is narrative in nature using facts and observations about the world. I am suspicious of politicians who try to engineer economic systems from the top down. I think people are a mix of self-interested and altruistic but the self-interested part dominates. What induces altruistic behavior is a desire for respect. I believe people (even economists) are prone to self-deception. I think the division of labor is limited by the extent of the market and is likely more important for creating prosperity than Ricardian comparative advantage.
What's on your list?"
What is the primary fiscal task that both parties see as being before them right now? Cutting the deficit and cutting spending, and for some people even raising taxes. Politicians see the deficit and spending as the problem and their answer is to cut it. Federal workers are under a pay freeze and a hiring freeze. The identification of the problem and the proposed solution to the problem are all Russ's "teams" problems and proposed solutions. Now ultimately they'll tinker around the edges, do a lot of dumb stuff, not make either of us happy, and probably continue this slow-motion austerity. But the idea that they're even in the ballpark of a Keynesian diagnosis and solution is a claim that doesn't make sense to me. If it weren't for automatic stabilizers that politicians have no control over, we'd have even less Keynesianism.
My solution is an institutional one - we need institutions that are less prone to these problems. We cannot hope that politicians are suddenly going to get Keynes. But we can influence institutions in a way that will improve performance - reform around debt limit laws, filibusters, ethics enforcement that guarantees we are actually providing for the general welfare and not individuals' welfare (consistent with Constitutional mandate), perhaps term limits, etc. And then of course we just need better economics education to reorient the discussion away from austerity.
In the next post I'll answer Russ's question on Smith.
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The $800 billion stimulus was not Keynesian, showing how little Russ knows.
ReplyDeleteThe stimulus should have been more than $800 billion and it should have been by the Chinese.
Pettis (2009:
If Keynes were around today he would probably make the same point he did over 60 years ago. Demand must be created by the current account surplus countries, which have, to date, relied on net exports to protect themselves from the consequence of their overcapacity. They must force demand up quickly in order to close the gap, and since expecting private consumption to rise quickly enough is unrealistic, it has to be public consumption – a large fiscal deficit.
Just as the US stupidly tried to increase its ability to dump capacity abroad by creating import restrictions (which has the effect of further expanding domestic production), China seems to be hoping for the same thing by increasing export rebates and slowing the currency appreciation (there is even increasing talk of depreciation).
Some more demand from China would be great, but I'm not sure that simple point closes the question, as you've been treating it the last couple days.
DeleteI am open to a rebuttal.
DeleteMy argument has two supports.
First, it seems to me that Pettis correctly reads Keynes (this is my appeal to authority)---that deficit spending has to come from the country with the current account surplus. Logically, this is so. The only way to raise employment is to increase production, hiring more people. That begs the question, who is going to pay for the new supply? Two answers are possible. First, stop imports and let the new supply merely be a substitution. Second, leave imports the same, and let the new supply come from the demand created by creating the supply.
Now, its seems to me that since this crisis started in June of 2007, we have been attempting the second course, wholly without success. We are now several trillions in debt and no solution in sight. Thus, I assert we have proved Keynes correct. The deficits should have been China's not ours.
Now, if you see some error in my conclusions, I would be glad to listen. Until then, my position is really simple, and, per Pettis, straight from Keynes.
Do not, from this, conclude that I am against the social safety net. I just happen to be a tax and spend Democrat. I strongly believe we should have taxed the rich and paid for an adequate social safety net.
My two cents is that our deficit flowed out of the Country for more imports and largely now sits in domestic bank accounts as repatriated profits. Look the the number going around about Apple, alone, with $300 billion or more in off shore cash/cash equivalents.
In sum, it seems to me the facts and evidence are on my side. Look forward to your reply
And, a little Martin Wolf in support
Deletehttp://www.ft.com/cms/s/0/a181f73a-e6b5-11df-99b3-00144feab49a.html#axzz2JQK6l433
The emphasis on tax cuts was hardly Keynesian, and even before it was passed, the economy had worsened considerably more than expected.
ReplyDeleteAs stated earlier, Russ Roberts (and for that matter, anyone else who sees Smith and Keynes in some giant conflict with one another) ought to read this paper...
ReplyDeletehttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1728225