Alan Blinder
and then Paul Krugman (with Richard Layard) wrote articles that showed up in
the last week of June – one in the WSJ (The Long and short of Fiscal Policy)
and one in the FT (Time to Speak Up: Manifesto for Economic Sense). They
basically say the same thing. Krugman and Layard go a little farther since they
are recruiting like-minded economists to show support for their manifesto. Please
do not humor these guys.
Since both
articles amount to the same thing let me try to summarize their arguments.
Policymakers who disagree with Krugman and Blinder are “inflicting massive
suffering.” This suffering comes from too much austerity. National demand needs
to be stimulated, preferably by hiring more police, firemen, and teachers
supplemented by more spending on national infrastructure. The government needs
to make up for the lack of spending on the private side. Larger government
deficits can be sustained by most countries but would damage long-term economic
growth if not reversed at the right time sometime in the future. There are no
supply constraints – the problem today is simply not enough spending.
I think this
is a bunch of hooey (silly or worthless talk) and hardly deserves a response
but it is either this or working in the yard in 105 degrees.
First
question I ask is: What austerity? I
wrote a post on that a few weeks back (May 22 Austerity is hot) and showed
there is not really much austerity going on except in Greece. Mostly we have
seen historically strong government stimulus.
Second, they
lament austerity in the US. But the numbers show nothing but government
deficits and rising debt as far as the eye can see. Surely these two economists
know the difference between stocks and flows. EVERY year a government has a
deficit means an economic stimulus. While it is true that a smaller deficit
yields a smaller stimulus, it remains that $1 trillion or so of deficits is
having a walloping impact on aggregate demand. Saying there is austerity in the
US now is like telling someone to eat a quart of ice cream to lose weight.
Third, in
virtually no US budget that I have seen is there anything amounting to spending
cuts. We all know that spending was increased dramatically at the onset of the
recession. Taking spending back to
normal levels would not be a cut in my book. But even that is not happening.
Spending continues to grow from these bloated levels.
Fourth – so
while I agree that private spending is holding back, I seriously doubt that more
government spending is the answer to our problems. We have plenty of government
spending thank-you.
Fifth –
these guys say that people who disagree with them are old fogies who fail to
embrace the new and relevant economics. But what are they embracing? Keynesian
economics is not exactly the Justin Bieber of economics.
Sixth, what they
are embracing is a remedy that simply does not fit the patient. “Nurse, give the patient more heart medicine. But Doctor, the patient hurt his big toe. I
don’t care, give him heart medicine.”
These
mouth-breathers say that governments did not cause the recession. They are
correct though decades of growing national debt definitely didn’t help us
prepare or deal with a financial crisis. What caused the recession some 5+
years ago was housing and finance. Do these guys not see that lacking remedies
for these problems, the economy is NOT going to improve? Do they not see how much trouble Europe is
having because of sovereign debt increases? Do they not see that promising a
return to fiscal balance at some unspecified time in the future is like your
daughter’s 16 year old boyfriend telling her that he will disengage just before
the big moment arrives?
Seventh,
these guys dismiss supply constraints as they obsess about demand. Yes demand
is weak. But demand is weak because banks won’t lend and because firms won’t borrow or hire. Banks won’t lend and firms won’t hire because they don’t see government
solving the housing and financial problems. In fact, many think them think the government is making
the financial problems worse as they throw a Spiderman net of regulation over
business activity from healthcare to investment.
Krugman and
Layard (and Blinder) want you to sign a manifesto (a ticket on the Titanic). I
suggest you send them free passes to the Betty Ford Clinic. They need a
time-out to get off this Keynesian high.
I love to be the first commenter....maybe because I am at work and just had the above discussion with my business partner. Where is the beef? Dr. D and others need to explain this to me because I cannot get it. The Obama Care legislation is touted to produce more jobs because of the increase in Medicaid at the state level where the government would match at 90% year 1 and 80% thereafter, Is this not the same as the unsustainable government created jobs program via the last three stimulus packages? Is it not a redistribution of money to support new workers who will handle the extra Medicaid needs. Somebody has to pay tax to support this gingerbread and some of that will come from increased cost of Medicare and of course taxing the wealthy. Does anyone know the definition of insanity? Then there is the Federal loan support of schools who get 90% of their income from these loans for degrees that have no meaning in our modern society and the borrower is stuck with payments that they cannot find a job that pays enough to handle the loan payments. Then the interest rate is artificially stuck at almost 0% even though the banks manipulated the LIBOR so they could make more fees and commissions. This was a stimulus but it was limited to a few people’s pockets.
ReplyDeleteWhat happened to the real old fashion way to generate wealth and value in the private sector...free market? More indirect taxes and hidden fees just create short term jobs in the public sector...except once a program gets started it is like a snow ball rolling down hill....like the GSA.
The only reason Keynesian economics is considered new is because it was forgotten in the early 80's and now is back with new fluff. It does not work.
Sounds like you have been eating your Wheaties James. Thanks for being first on the block. You question why Keynesian economics might be popular. It seems to me it is popular because it offers hope for a quick remedy. And on the surface it sounds ever so reasonable. People are not spending so the government offers a bit of temporary spending. Once the economy gets going then people spend more and the government can withdraw. Unfortunately this child's tale oversimplifies. First, it doesn't allow for the law of unintended consequences which deny even a temporary impact. Second, it never says much about what happens when people get hooked on government spending. Right now more Keynesian stimulus is both useless and counterproductive since it does not address what is wrong.
ReplyDeleteI really like the example used by Herman Cain...yes, he's still around...when he says that we don't blow up the house to fix a leak in the roof. I truly believe that Krugman, et al would like to see nothing else. After all, it's what the president seems intent on doing.
ReplyDeleteHi Jon,
ReplyDeleteI agree that the issue is mostly costs and the rate of increase of costs. But some folks think that health care would be MORE available to people under Obamacare. While some poor do get treated without Obamacare they argue they would get better care if they had an insurance policy. Both issues are debatable and only time will tell. I am guessing that there will still be many people without care -- and that costs will increase more than expected. But Obama's supporters believe the opposite. I guess we will see...
The original objective of Obama in 2008 was to reduce the cost of health care without increasing taxes. For example; Hospital A competes with Hospital B. A is public and must take the poor and B is private and does not. Both offer the state of the art labs, diagnostic equipment etc. Most of it is underutilized unless they also have their own network of Doctors. To pay for the equipment and also for A to pay for the poor they charge more for room visits. Insurance companies try to limit room stay time but end up paying in the end and just raise the rates. This means increasing costs for medical care and for insurance and there is no attempt to reward to healthy or proactive people.
ReplyDeleteAgreed some illnesses occur whether a person otherwise lives a healthy life or not. However, a large amount of treatable illnesses are caused by a poor life style. It would seem that funds better spent would be for helping people connect the dots here. Additionally, there is the litigation. NO, I do not think Doctors are perfect. However, excessive PI litigation has caused doctors to over test, over prescribe and over depend on equipment.
James, it is generous of you to start by saying that Obama's goal was to reduce the cost of healthcare. Seems to me that his main goal was to give more people healthcare. His pointy-headed advisers told him that if they wrote enough pages of legislation they could convince/confuse people that you could cover all these extra people AND reduce costs. So Obama could claim he is reducing costs as he was covering another 30 million people. Sorry but I am not convinced yet. It is true that some of those 30 million did have health costs that were covered by the rest of us. And it is also true that some of those 30 million people will now be paying into the system through a tax/penalty. But I still don't see how a new entitlement is going to cost us less. There are not many examples of this happening in the recent past. For example how do current Medicare expenditures of the Federal government compare to what was envisioned when this benefit was originally passed?
ReplyDeleteDear LSD. Yeah, Krugman et al know only one tune and it’s getting old. But, like the Pied Piper they have followers and like the Pied Piper I wish they would all go away --- forever. Maybe we just need to put cotton in our ears.
ReplyDeleteYesterday I chatted with a neighbor who I regard as a reasonably objective and intelligent thinker at our neighborhood pool party -- our county/area is overwhelmingly R. He declared his political independence (I not R) and said trickle down didn’t work under Bush I and II (he didn’t mention Reagan though I purposely didn’t either to avoid an escalation in a friendly chat) and stimmilus didn’t work either and that some balance betwixt free market capitalism and govomit spending is needed but – like so many others – could not specify what that ideal balance should be. I found his rejection of/incredulity of free market capitalism as the desired economic philosophy curious since – at least to us – there is tremendous evidence that govomit interference is counter productive. I guess we’ll have to keep wunnering why so many educated/intelligence folks just don’t get it.
Like James said/asked, what happened to the real old fashion way of generating wealth and value? Answer = too many blue levers pulled.
Thanks Charles,
ReplyDeleteYou summed it up pretty well -- history is full of conflicting information both supporting and refuting the benefits of market capitalism. A bright economist or historian can usually find whatever he or she wants in all that information. Perhaps there is some objective summary which supports a smaller government, but it will have a hard time competing with all the other stories. So we are left with a tug-o-war in which one side or the other tries to offset too much movement in the wrong direction. We are humans right?
Back to Obamacare. The public was led to beleive that the purpose was to reduce the cost of healthcare which was excelerating faster than a oil prices or college tuition. Employers were and still are having a hard time keeping up and I know may people who are paying as much for their healthcare per month as they do for their mortgage.
ReplyDeleteWhat did the WHO say? " We won't be fooled again". Obama's change was actually not reducing the health care but adding 30,000,000 new people at the expense of our...I gues it is now a tax and increases in Medicare payments to take care of this. Thisis said by many to create 400,000 non sustainable jobs at the healthcare level....so he is ehlping the economy in an indirect way. Plus the providers have to take all comers.
Now we see the Chicago based Obama election crew trapping the R candidate in trivia about tax or not a tax. None of that is relevant to what is really going on....it is a good distraction and the media love distrations.
Yeah, but is he human?
ReplyDeleteI was at a Federalist Soc/Liberty Fund conference last weekend on Crises. One of the readings was from Brad DeLong and was surprising. He came out against active fiscal policy. He said automatic stabilizers were great--- that is, running deficits during bad times simply by not changing government spending. He noted, tho, that active fiscal policy never seemed to be done right, and that politicians were unable to implement the idea of deficits during recessions, surpluses during booms--- they like the idea of deficits all the time better.
ReplyDeleteAs you say, we're in no sense in a time of government austerity now in America.
Thanks Eric -- and it is getting worse. Because of an impending slowdown in the economy towards the end of this year any real austerity could still be a year away -- making it more than 4 years since the recovery began. If not then,when?
ReplyDelete