Friday, February 15, 2013

Yes, a lot of people have a very odd view of the 1970s

Krugman has a great post on the myth of Keynesian excess and the problems of the 1970s:
The truth is that whatever you might say about economic policy in the 1970s, it had nothing to do with Keynesian fiscal policy — and did not involve increasing debt. People on the right tend to use “Keynesian” to mean “liberal stuff I don’t like”, but aside from that definition, the 70s tell us nothing about the issues we’re discussing right now. You can argue that monetary policy was too loose, that the Fed was too expansionary in 1972 (when Arthur Burns was trying to reelect Richard Nixon) and that it failed to tighten in the face of oil-shock-driven inflation. But again, the idea that this experience has any relevance to expansionary fiscal policy in the face of a liquidity trap is totally bogus.

But I guess I should have expected this; after all, it’s also standard to argue that the troubles of the 70s somehow proved that the welfare state is the root of all economic evil, which makes equally little sense.

The 70s were important for economics. They did kill the notion of a stable Phillips curve that doesn’t depend on expected inflation, and convinced Keynesian as well as non-Keynesian economists that there is a minimum level of unemployment that can’t be reduced with demand-side policies (although we learned that lesson too well; recent experience shows that there is a lot of nominal stickiness at low inflation rates).
This chart is also nice:



Now to all this, add this passage from Buchanan's "Democracy in Deficit":

“We are all Keynesians now.” This was a familiar statement in the 1960s, attributed even to the likes of Milton Friedman among the academicians and to Richard Nixon among the politicians. Yet it takes no scientific talent to observe that ours is not an economic paradise. During the post-Keynesian, post-1960 era, we have labored under continuing and increasing budget deficits, a rapidly growing governmental sector, high unemployment, apparently permanent and perhaps increasing inflation, and accompanying disenchantment with the American sociopolitical order. 
This is not as it was supposed to be. After Walter Heller’s finest hours in 1963, fiscal wisdom was to have finally triumphed over fiscal folly. The national economy was to have settled down on or near its steady growth potential, onward and upward toward better things, public and private. The spirit of optimism was indeed contagious, so much so that economic productivity and growth, the announced objectives for the post-Sputnik, post-Eisenhower years, were soon abandoned, to be replaced by the redistributionist zeal of Lyndon Johnson’s “Great Society” and by the no-growth implications of Ralph Nader, the Sierra Club, Common Cause, and Edmund Muskie’s Environmental Protection Agency. Having mastered the management of the national economy, the policy planners were to have moved on to quality-of-life issues. The “Great Society” was to become real. 
What happened? Why does Camelot lie in ruin? Viet Nam and Watergate cannot explain everything forever. Intellectual error of monumental proportion has been made, and not exclusively by the ordinary politicians. Error also lies squarely with the economists.

The academic scribbler of the past who must bear substantial responsibility is Lord Keynes himself, whose ideas were uncritically accepted by American establishment economists. The mounting historical evidence of the effects of these ideas cannot continue to be ignored. Keynesian economics has turned the politicians loose; it has destroyed the effective constraint on politicians’ ordinary appetites. Armed with the Keynesian message, politicians can spend and spend without the apparent necessity to tax. “Democracy in deficit” is descriptive, both of our economic plight and of the subject matter for this book."
Whenever I read from Democracy in Deficit I always have the same reaction that I do reading Hayek on "scientism". I think "how could someone who was otherwise so brilliant go so terribly wrong?". It happens I suppose.

Notice the strange conflation of everything liberal he doesn't like with Keynesianism. Notice the bizarre characterization of fiscal irresponsibility as the origin of the problems of the 1970s (this was written in 1977).

I especially like the line about Camelot in ruins and Vietnam. For international readers that may not know, "Camelot" is a reference to Kennedy. The ironic thing here is that despite the tepid semi-embrace of Keyesian ideas by Roosevelt, Kennedy is usually the president most associated with a deliberate application of Keynesian principles due to his Keynesian advisors, not Johnson - who had other priorities. But apparently the loss of Camelot to the Great Society is some kind of Keynesian problem? The other guy that applied Keynesian principles pretty decently (aside from 2009 Obama) was Bill Clinton, consolidating our fiscal position in the growth years of the 1990s.

Of course, Kennedy, Clinton, and Obama don't fit as nicely into Buchanan's narratives about Keynesians abandoning prudent fiscal policy. To get Buchanan's answer you have to fabricate what went on in the 1970s (like Holtz-Eakin), redefine Keynesianism, and somehow make the argument that politicians who were not Keynesian at all were somehow enabled to do what they did because Keynes was just so awful and killed any sense of fiscal responsibility (as if politicians need an economic theorist to give them license to behave badly, and as if it even makes sense to talk about Keynes as a potential source of such license).

20 comments:

  1. btw - if you want to target an economist who made politicians indifferent to debt, I'd think that would be Robert Barro and New Classical Economics.

    I wouldn't be so quick to tie these political trends to economists as Buchanan is, but the growth in public debt seems to make a lot more sense when you look in that direction.

    ReplyDelete
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    ReplyDelete
  3. To get Buchanan's answer you have to fabricate

    and yet when this guy passes

    A.H.

    ReplyDelete
    Replies
    1. ????

      If you are implying something on the order of what Yglesias said, I have to disagree. Buchanan's contribution is not exhausted in Democracy in Deficit.

      Delete
    2. Daniel

      you wrote, "To get Buchanan's answer you have to fabricate"

      So you admit the man was a liar, by your own words.

      Now, how do you draw the line between him and Hitler? Hitler lied a lot. He lied a little.

      When you go to a restaurant and they give you an order of "beef stew" and the first piece of meat is rancid horse flesh, Do you keep pushing your fork around looking for a good piece of beef or do you spit out the horse flesh and push away the whole dish in disgust.

      I push the dish away in disgust and you should learn to do such.

      A.H.

      Delete
  4. Can We blame Keynes if we blag the stagflation on Brenton Woods or does Harry White get all the blame?

    I actually think that in certain ways you can blame stagflation on Keynesian economics but the intellectual history there is far deeper and more subtle than Ralph Nader and the Phillips curve.

    ReplyDelete
  5. "Whenever I read from Democracy in Deficit I always have the same reaction that I do reading Hayek on "scientism". I think "how could someone who was otherwise so brilliant go so terribly wrong?". It happens I suppose."

    It's human nature, Daniel. Making intellectual blunders aside, brilliant people have made astoundingly poor choices in the past, and there will be other brilliant people who will make astoundingly poor choices: Dominique Strauss-Kahn and Richard M. Nixon, to name two examples. I'm sure that one can name many more, but that'll take too long.


    "I especially like the line about Camelot in ruins and Vietnam. For international readers that may not know, "Camelot" is a reference to Kennedy. The ironic thing here is that despite the tepid semi-embrace of Keyesian ideas by Roosevelt, Kennedy is usually the president most associated with a deliberate application of Keynesian principles due to his Keynesian advisors, not Johnson - who had other priorities. But apparently the loss of Camelot to the Great Society is some kind of Keynesian problem? The other guy that applied Keynesian principles pretty decently (aside from 2009 Obama) was Bill Clinton, consolidating our fiscal position in the growth years of the 1990s."

    With regard to describing Bill Clinton's economic policies as "Keynesian", Daniel...I can certainly see where you're coming from, and I would agree with you. However, most wouldn't. At the time, fiscal consolidation in the early 1990ies seemed like a bit of a risky move...then again, the recession in the early 1990ies was rather mild in comparison to the current Great Recession the U.S. is undergoing, of course. So far though, and in my judgement, economists have yet to establish proper guidelines for using (and the scope and detail of) expansionary fiscal stimulus and the proper guidelines for fiscal consolidation.

    Why did Bill Clinton's decision to balance the budget work?

    ReplyDelete
    Replies
    1. Keynes said it would

      A.H.

      Delete
  6. Buchanan's argument is spot on. Keynes forgot or ignored all hard earned lessons of what liberal government means and provided a rational for unlimited spending by the state no matter the consequences. Not surprising given how conceited Keynes was and his dim view of those whose lives he wished to control and manipulate for their own good.

    ReplyDelete
  7. I had a different view of the 70s.

    http://www.flickr.com/photos/bob_roddis/871341764/in/set-72157600948964672/

    ReplyDelete
  8. If you have access to articles from Time, this one from 31 December 1965 conveys the spirit of the times:

    http://www.time.com/time/printout/0,8816,842353,00.html

    If not, I have a little piece of it here:

    http://newarthurianeconomics.blogspot.com/2011/04/april-fools.html

    ReplyDelete
  9. Hey Daniel. I agree with the central premise-that the 70s as they are explained by conservative anti Keynesiams is something of an urban legend. It's ironic that the things that are most often pointed to as showing that 70s "stagflation" is around the corner is high debt and deficits. Yet the 70s was low debt and a low deficit.

    Then everyne thought Reagan's tax cut was going to blowup inflation even furhter while running up the deficit. They were rignt on the seond point but wrong on the first.

    Still whatever you think about Buchanan-I'm not necessarily denying he was great-what in those quotes you have given do you really think he would have later disagreed with? I mean in what way can you argue these weren't his longer term views? Wasn't he nothing if not an anti Keynesian? Whether you like him or not-a conservative would see that as a selling point.

    As for Clinton, I like him, don't get me wrong, he revitalized the Democrtic party, gave us the longest peacetime economc expansion in U.S. hisotry and set the table for Obama. However, what was really Keynesian about his policies? Again, I'm playing Devil's Advocate.

    After all don't many conservatives try to claim him for themselves? His big agenda item was balancing the budget, keepning the bond vigilantes happy and ending welfare-in any meaningful form.

    What about this is partiuclarly Keynesain? I guess if you read Keynes as being a New Keynesian who believes in countercylical policy-so you balance the budget during booms and run up deficits during busts.



    ReplyDelete
    Replies
    1. keynes was for balanced budgets

      obviously, you don't understand Keynes

      A.H.

      Delete
  10. I don't think softness on deficit was the cause of staflation in the 70's, at least not compared to now. Softness on inflation may have been as inflation reached unseen levels in the US in the late 70's. That also effectively increased taxes significantly, and created uncertainty and disrupted credit market to a degree. I think the use of floating rate mortgages became common then for the first time. A simple fixed rate mortgage with a high nominal rate, a low real rate, and fixed nominal payments would have it payment in real term be the very much higher early in its terms than at the end. That effectively froze a lot of people out of houses. Wage and price controls were a policy response with their own drawbacks. The controls on oil prices were in effect until Reagan became president. Finally, I think it is reasonable to assume higher inflation is also more uncertain inflation.

    The idea of a stable and policy exploitable Phillips curve may have lead to higher inflation, and that idea may be arguably be said to Keynesian. I wouldn't blame Lord Keynes for it however.

    ReplyDelete
    Replies
    1. Running the price of oil up from $2.50 bbl to over $30 bbl in a matter of months was very inflationary.

      Delete
  11. "The other guy that applied Keynesian principles pretty decently (aside from 2009 Obama) was Bill Clinton, consolidating our fiscal position in the growth years of the 1990s."

    I wish liberals would just cut out this nonsense. The only reason the budget turned to a surplus in the Clinton years was because of the $10 trillion stock market bubble and the extra (phony) revenue that the bubble created. This fact is depicted very clearly in the CBO's projections prior to the bubble. The idea that Clinton somehow made tough, Keynesian decisions to balance the budget belongs in the fiction books.

    ReplyDelete
    Replies
    1. Clinton raised taxes, which was very Keynesian, but you have never read nor understood Keynes.

      When you come down from the Mountain with tablets from Big Ernie telling us the value of everything, let us know. Until then, you are a low information commentator---stop commenting.

      The rest of us have the good sense to know that there are no economic or other laws or rules that establish the value of anything. Go spend the rest of your days reading Midnight in the Garden of Good and Evil, repeating the immortal words of Jim Williams, "Sport, Truth, Like Art, is in the eye of the beholder."

      Economics, life itself, is a confidence game. If you buy a stock, you believe it is going up in price. The seller believes it is going down.

      A.H.

      Delete
    2. I'm sorry, but this is one of the most ridiculously uninformative comments I have ever read. You've said nothing. I award you no points, and may God have mercy on your soul.

      Delete
  12. Dean Baker on Rubinomics:
    http://www.cepr.net/index.php/blogs/beat-the-press/can-we-cut-the-crap-on-robert-rubin-and-deficit-reduction

    DeLong disagrees but I lean towards the Baker view. Instead of enacting his "middle-class" spending bill/campaign promise, Clinton bent the knee to the bond market and Greenspan. Greenspan did allow unemployment to drift down to 4 percent, in the midst of the Internet years. Did the bond market help the boom? Not according to Baker. Greenspan was also fighting international financial crises in the late '90s and so keeping monetary policy accomodative.

    It is interesting that Clinton blurbed Alan Blinder's good book and yet Blinder criticizes some of Rubin's deregulatory policies.

    ReplyDelete
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