Tag: Keynesian economics

Ricardo Paging Alan Blinder

I almost hesitate to suggest that anyone actually read Alan Blinder’s defense of Keynesian economics in today’s Wall Street Journal, except that the piece lays out clearly in my mind why Blinder is so wrong.  The only part you really need to read is:

In sum, you may view any particular public-spending program as wasteful, inefficient, leading to “big government” or objectionable on some other grounds. But if it’s not financed with higher taxes, and if it doesn’t drive up interest rates, it’s hard to see how it can destroy jobs.

So in Blinder’s world, deficits are explicitly not future taxes, despite what I believe is a fairly strong consensus among economists that some form of Ricardian equivalence holds (see John Seater’s literature review and conclusion, “despite its nearly certain invalidity as a literal description of the role of public debt in the economy, Ricardian equivalence holds as a close approximation.”).  Perhaps Blinder is blind to the fact that deficits are so much a part of the public debate today because households absolutely see those deficits as future taxes.

I also think Blinder misses that fact that crowding out can occur without raising interest rates.  As Cato scholar Steve Hanke points out, the Fed’s current policies have basically killed the interbank lending market, which has encouraged banks to load up on Treasuries and Agencies, rather than lend to the productive elements of the economy.  While I sadly don’t expect most mainstream macroeconomists to focus on the link between the banking sector and the macroeconomy, Blinder has no excuse; he served on the Fed board.

As I have argued elsewhere, banks are indeed lending, but to the government, not the private sector.  The simplistic notion that crowding out can only occur via higher interest rates, as if price is ever the only margin along which a decision is made, has done serious harm to macroeconomics.  But then if macroeconomists actually understood the mechanics of financial markets, then we might not be in this mess in the first place.

Heckuva Job on that Stimulus!

Based on this morning’s numbers, I’ve updated my chart showing what the Obama Administration said would happen with the so-called stimulus compared to what actually has happened. As you can see, the unemployment rate is about 2.5 percentage points higher than the White House claimed it would be at this point.

Since I just did an I-told-you-so post about Greece, I may as well pat myself on the back again (albeit for another completely obvious prediction). Here’s the video I narrated a couple of years ago on the Obama faux stimulus.

Bernanke’s Soft-Core Keynesianism Is Even Worse than the Nonsensical Analysis of Hard-Core Keynesians

Earlier this week, the Washington Post predictably gave some publicity to the Keynesian analysis of Mark Zandi, even though his track record is worse than a sports analyst who every year predicts a Super Bowl for the Detroit Lions. The story also cited similar predictions by the politically connected folks at Goldman Sachs.

Zandi, an architect of the 2009 stimulus package who has advised both political parties, predicts that the GOP package would reduce economic growth by 0.5 percentage points this year, and by 0.2 percentage points in 2012, resulting in 700,000 fewer jobs by the end of next year. His report comes on the heels of a similar analysis last week by the investment bank Goldman Sachs, which predicted that the Republican spending cuts would cause even greater damage to the economy, slowing growth by as much as 2 percentage points in the second and third quarters of this year.

Republicans understandably wanted to discredit this analysis. But rather than expose Zandi’s laughably inaccurate track record, they asked the Chairman of the Federal Reserve, Ben Bernanke, for his assessment. But this is like asking Alex Rodriguez to comment on Derek Jeter’s prediction that the Yankees will win the World Series.

Not surprisingly, as reported by McClatchy, Bernanke endorsed the notion that spending cuts (actually, just tiny reductions in planned increases) would be “contractionary.”

Bernanke was asked repeatedly about GOP proposals to trim anywhere from $60 billion to $100 billion in government spending during the current fiscal year, which ends Sept. 30. These cuts would do little to bring down long-term budget deficits but would slow the economic recovery, he cautioned. “That would be ‘contractionary’ to some extent,” Bernanke said, projecting that “several tenths” of a percentage point would be shaved off of growth, and it would mean fewer jobs. …While Democrats got what they wanted out of Bernanke with that answer, he frowned on some of their projections that the spending cuts that are being debated could reduce growth by a full 2 percentage points.

Since he is not a fool, Bernanke was careful not to embrace the absurd predictions made by Zandi and Goldman Sachs. But that’s merely a difference of degree. Bernanke’s embrace of Keynesian economics is disgraceful because he should know better. And his endorsement of deficit reduction (at least in the long run) is stained by crocodile tears since Bernanke supported bailouts and endorsed Obama’s failed stimulus.

But while Bernanke is not a fool, I can’t say the same thing about Republicans. Bernanke has made clear that he either believes in the perpetual-motion machine of Keynesianism, or he’s willing to endorse Keynesian policies to curry favor with the White House. Republicans should be exposing these flaws, not treating Bernanke likes he’s some sort of Oracle.

The Consumer Spending Fallacy behind Keynesian Economics

I’m understandably fond of my video exposing the flaws of Keynesian stimulus theory, but I think my former intern has an excellent contribution to the debate with this new 5-minute mini-documentary.

The main insight of the mini-documentary is that Gross Domestic Product (GDP) only measures how national output is allocated between consumption, investment, and government. That’s useful information in many ways, but if we want more output, we should focus on Gross Domestic Income (GDI), which measures how national income is earned.

Focusing on GDI hopefully would lead lawmakers to consider ways of boosting employee compensation, corporate profits, small business income, and other components of national income. Focusing on GDP, by contrast, is misguided since any effort to boost consumption generally leads to less investment. This is why Keynesian policies only redistribute national income, but don’t boost overall output.

You may recognize Hiwa. She narrated a very popular video earlier this year on the nightmare of income-tax complexity.

Where are the ’60s Hippies Now that They’re Needed to Fight Keynesianism?

Keynesian economic theory is the social science version of a perpetual motion machine. It assumes that you can increase your prosperity by taking money out of your left pocket and putting it in your right pocket. Not surprisingly, nations that adopt this approach do not succeed. Deficit spending did not work for Hoover and Roosevelt is the 1930s. It did not work for Japan in the 1990s. And it hasn’t worked for Bush or Obama.

The Keynesians invariably respond by arguing that these failures simply show that politicians didn’t spend enough money. I don’t know whether to be amused or horrified, but some Keynesians even say that a war would be the best way of boosting economic growth. Here’s a blurb from a story in National Journal.

America’s economic outlook is so grim, and political solutions are so utterly absent, that only another large-scale war might be enough to lift the nation out of chronic high unemployment and slow growth, two prominent economists, a conservative and a liberal, said today. Nobelist Paul Krugman, a New York Times columnist, and Harvard’s Martin Feldstein, the former chairman of President Reagan’s Council of Economic Advisers, achieved an unnerving degree of consensus about the future during an economic forum in Washington. …Krugman and Feldstein, though often on opposite sides of the political fence on fiscal and tax policy, both appeared to share the view that political paralysis in Washington has rendered the necessary fiscal and monetary stimulus out of the question. Only a high-impact “exogenous” shock like a major war – something similar to what Krugman called the “coordinated fiscal expansion known as World War II” – would be enough to break the cycle. …Both reiterated their previously argued views that the Obama administration’s stimulus was far too small to fill the output gap.

Two additional comments. First, if Martin Feldstein’s views on this issue represent what it means to be a conservative, then I’m especially glad I’m a libertarian. Second, Alan Reynolds has a good piece eviscerating Keynesianism, including a section dealing with Krugman’s World-War-II-was-good-for-the-economy assertion.

Warren Buffett: Good Investor, Crummy Economist

Warren Buffett once said that it wasn’t right for his secretary to have a higher tax rate than he faced, leading me to point out that he didn’t understand tax policy. The 15 percent tax rates on dividends and capital gains to which he presumably was referring represents double taxation, and when added to the tax that already was paid on the income he invested (and the tax that one imagines will be imposed on that same income when he dies), it is quite obvious that his effective marginal tax rates is much higher than anything his secretary pays. Though he is right that his secretary’s tax rate is much too high. 
Well, it turns out that Warren Buffett also doesn’t understand much about other areas of fiscal policy. Like a lot of ultra-rich liberals who have lost touch with the lives of regular people, he thinks taxpayer anger is misguided. Not only does he scold people for being upset, but he regurgitates the most simplistic Keynesian talking points to justify Obama’s spending spree. Here’s an excerpt from his hometown paper.

Taxpayer anger against President Barack Obama and Congress is counterproductive because policy makers took measures including deficit spending to stimulate the economy, billionaire investor Warren Buffett told CNBC. …“I hope we get over it pretty soon, because it’s not productive,’’ Buffett said. “We will come back regardless of how people feel about Washington, but it is not helpful to have people as unhappy as they are about what’s going on in Washington.” …“The truth is we’re running a federal deficit that’s 9 percent of gross domestic product,” Buffett said. “That’s stimulative as all get out. It’s more stimulative than any policy we’ve followed since World War II.”

About the only positive thing one can say about Buffett’s fiscal policy track record is that he is nowhere close to being the most inaccurate person in the United States, a title that Mark Zandi surely will own for the indefinite future.

More Evidence of the Failed Stimulus

Not that we need more evidence, but here is a story from Los Angeles revealing that the city only created 55 jobs with $111 million of stimulus funds. This translates to a per-job cost of $2 million, which is a grossly inefficient rate of return. But this calculation is incomplete because it doesn’t measure how many jobs would have been created if the money had been left in the productive sector of the economy. Moreover, it’s also important to consider long-term costs such as the fact that Los Angeles now has more overhead, which will exacerbate the city’s fiscal problems.

A snippet:

The Los Angeles City Controller said on Thursday the city’s use of its share of the $800 billion federal stimulus fund has been disappointing. The city received $111 million in stimulus under the American Recovery and Reinvestment Act (ARRA) approved by the Congress more than a year ago.

“I’m disappointed that we’ve only created or retained 55 jobs after receiving $111 million,” says Wendy Greuel, the city’s controller, while releasing an audit report.

…The audit says the numbers were disappointing due to bureaucratic red tape, absence of competitive bidding for projects in private sectors, inappropriate tracking of stimulus money and a laxity in bringing out timely job reports.