J. Bradford DeLong's Blog, page 2187

Why I Have Become a Lot More Keynesian Over the Past Three Years

Paul Krugman explains:

How The Other Half Thinks: Ezra Klein has written in, asking for a post laying out the difference between the more or less Keynesian model Brad DeLong and I work with and the models others have been using – and how their predictions differ. It’s a good request, although the truth is that the other side in this debate doesn’t necessarily agree on a single model, or even use models at all. Still, I think it is possible to describe the general views....

[T]he other side in this debate generally adheres, more or less, to something like what Keynes called the “classical theory” of employment, in which employment and output are basically determined by the supply side. Casey Mulligan has been most explicit here, coming up with increasingly, um, creative stories about how what we’re seeing is a choice by workers to work less; but the whole Kocherlakota structural unemployment thing is similar in its implications....

Once you have a more or less classical view of unemployment, you naturally have the classical theory of the interest rate, in which it’s all about supply and demand for funds, and something like a quantity theory of money, in which increases in the monetary base lead, in a fairly short time, to equal proportional rises in the price level.

This led to the prediction that large fiscal deficits would lead to soaring interest rates, and that the large rise in the monetary base due to Fed expansion would lead to high inflation.

You can see the classical theory of interest and the soaring-rate prediction clearly in Niall Ferguson’s remarks:

After all, $1.75 trillion is an awful lot of freshly minted treasuries to land on the bond market at a time of recession, and I still don’t quite know who is going to buy them … I predict, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realize just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates

and, of course, in many WSJ op-eds, in analyses from Morgan Stanley, and so on. Meanwhile, you can see the high-inflation prediction in pieces by Meltzer and Laffer — with the latter helpfully titled, “Get Ready for Inflation and Higher Interest Rates”.

While the other side was making these predictions, people like me were saying that classical economics was all wrong in a liquidity trap... where desired savings (at full employment) exceeded desired investment, and hence savings would expand to meet the demand, and interest rates need not rise. As for inflation, increases in the monetary base would have no effect in a liquidity trap; deflation, not inflation, was the risk.

So, how has it turned out? The 10-year bond rate is about 2.5 percent, lower than it was when Ferguson made that prediction. Inflation keeps falling. The attacks on Keynesianism now come down to “but unemployment has stayed high!”... if you took a Keynesian view seriously, it suggested even given what we knew in early 2009 that the stimulus was much too small to restore full employment....

[R]ecent events... amounted to a... clear test of Keynesian versus classical economics — and Keynesian economics won, hands down.

Tyler Cowen Finds the Excellent Red Plenty

TC:

Marginal Revolution: Red Plenty:

"No!" said the Chairman in triumph.  "No subsidy!"  This is America!  Don't you see that the very fact that the hemburger [sic] kiosk is there means that somebody has worked out how to make a profit by selling the meal at fifteen cents.  If the capitalist who owns the kiosk couldn't make a profit at that price, he wouldn't be doing it.  That is the secret of everything we see here."

Here is one Amazon review of the book, Francis Spufford's latest:

This is a fantastic, innovative look at the economic policies of the USSR under Khrushchev. If my opening sentence sounds dull, please don't see it as a true representation of this book. Spufford's approach is to interweave extensive research with the imagination and invention of a novelist. The end result is a fantastic patchwork in which fictional characters rub shoulders with historical ones and stunning descriptive passages add lustre to what might have been dry, factual information.

It's one of the most stylish fictional experiments of the year, and yet it suddenly, and repeatedly, breaks into disquisitions about market socialism, Oskar Lange, the measurement of Soviet gdp, and Leonid Kantorovich. Here is one Guardian review of the book.  Here is a Telegraph review, also a rave.  Here is more praise. 

A Picky Historical Correction...

Paul Krugman writes:

How The Other Half Thinks - NYTimes.com: [T]he Cochrane-Fama thing about how a dollar of government spending necessarily displaces a dollar of private spending is basically a classical view, although there doesn’t seem to be a model behind it, just a misunderstanding of what accounting identities mean...

The Cochrane-Fama--and also Lucas--view that fiscal policy must necessarily be ineffective was, I think, not a true "classical" view at all.

It is certainly true that it was implied by Jean-Baptiste Say in his 1803 Treatise on Political Economy and his 1821 Letters on Malthus as a corollary. Say (then) maintained that since nobody produced except to use or sell and that nobody sold except to buy, the idea of a "general glut" was incoherent. And if nothing can decrease aggregate demand, than nothing--especially not fiscal policy--can increase it either. But by 1829 Say was no longer attached to Say's Law: the 1825-6 financial crisis and consequent depression in Britain had led him to reconsider his view.

And it was in 1829 that John Stuart Mill put his finger on it: in a monetary economy, excess demand for money will necessarily be associated with excess supply for currently-produced goods and services.[1]

After 1829, the first person I can find to claim that fiscal policy has absolutely no effect is R.G. Hawtrey in his unwise "Treasury View" paper, "Public Expenditure and the Demand for Money" in Economica in 1925. Hawtrey assumes that the velocity of money is completely interest-inelastic but somewhat procyclical, thus monetary policy has effects but fiscal policy does not.

The next person I can find is Friedrich Hayek, whose model I have never been able to understand but seems to entail not only that fiscal policy cannot boost output but that monetary policy cannot either. Maynard quoting Skidelsky:

Hayek came to Cambridge in January 1931 to give a one-lecture version of his theory to the Marshall Society before starting on his LSE lectures. His exposition was greeted with complete silence. Keynes was in London, but Richard Kahn, who was in the audience, felt he had to break the ice. 'Is it your view', he asked hayek, 'that if I went out tomorrow and bought a new overcoat, that would increase unemployment?' 'Yes,' replied Hayek, turning to a blackboard full of triangles, 'but it would take a very long mathematical argument to explain why.'

But Hayek's and Hawtrey's views were not taken up by even the craziest of the post-WWII crazies. Henry Hazlitt believes that fiscal policy could shift demand forward in time from the future to the present:

The Wisdom of Henry Hazlitt: How would that deficit [spending] be financed?... [I]f the money were borrowed, then the previous spending stimulus would be reversed by a deflation when the borrowing was repaid...

And Jacques Rueff did so as well:

[I]nvestment expenditures can... reduce temporary unemployment...they entail secondary effects... Financed by taxes and loans... Purchasing power taken away from individuals... the investment program [may] increase employment...

What seems to have happened is this: John Maynard Keynes, in his General Theory, argued that "classicals" are logically committed to a strong version of Say's Law in which fiscal policy is ineffective, even though they have not recognized it. And so Cochrane, Fama, Lucas, and company pick that up and say "oh, that's what we must believe" even though they have no understanding of why they are supposed to believe it.

[1] Alan Taylor emails that we should not forget Thomas Attwood, who almost had it in 1817:

Thomas Attwood in 1817: http://books.google.com/books?id=IcFHAAAAIAAJ&printsec=frontcover&dq=thomas+attwood&hl=en&ei=DGVFTOLMEoS0lQeNq-XEBA&sa=X&oi=book_result&ct=result&resnum=5&ved=0CEEQ6AEwBA#v=onepage&q&f=false. See pages 28-42 ish -- especially 34-35 and 38-40. Does he have the model down 8 years before Mill? Not perhaps in a totally coherent way.

Attwood is the Birmingham School leader whom Mill was ridiculing in the Currency Question pamphlet two decades later (1844). http://en.wikipedia.org/wiki/Thomas_Attwood http://en.wikipedia.org/wiki/Birmingham_School_(economics) http://books.google.com/books?id=e1ZEPd_pQnoC&lpg=PA23&ots=aMKvHOgE7k&dq=thomas%20attwood%20glasner&pg=PA22#v=onepage&q=thomas%20attwood%20glasner&f=false

The Recovery Is Not Yet Well-Established

Calculated Risk:

Calculated Risk: September Employment Report Preview: 1) The consensus is for a headline payroll number of zero (no net payroll jobs added or lost) and for the unemployment rate to increase to 9.7% in September from 9.6% in August.

Goldman Sachs is forecasting a minus 50,000 headline payroll number and an increase in the unemployment rate to 9.7%.

2) My estimate is the decennial Census workforce was reduced by 78,000 in August. This suggests a consensus headline payroll number of +78,000 ex-Census...

It would have been nice if Barack Obama had, a year ago, launched a major effort to rebuild America's infrastructure on the grounds that it would be criminal not to take advantage of the extraordinarily low interest rates at which the United States government could borrow...

Hoisted from Comments: What Is "Monetary Policy"?

Joe Gagnon writes:

What Is This "Demand for Money" of Which You Speak?: Joe Gagnon said...

Hi Brad,

Good column. I agree with the substance of your analysis. But to continue a terminological debate we had about 6 months ago, I would like to propose defining monetary policy as printing money to buy assets and fiscal policy as selling assets to buy goods or make transfers. Thus, helicopter drops are just monetary + fiscal policy.

Away from the zero bound, monetary policy can stick to buying safe short-term assets because money yields zero and all other assets have a positive yield. At the zero bound, as you note, for monetary policy to have any effect it must buy other types of assets that do not have zero yield. But in both regimes the way monetary policy works is by pushing down the rates of return on financial assets. That is quite distinct from fiscal policy which works by increasing demand directly, albeit at the expense of higher rates of return on financial assets. And of course, helicopter drops increase demand directly without increasing rates of return on financial assets.

Hoisted from Comments: How Much Do I Earn?

Larry Siegel writes in comments:

We Are the Super Rich: OK, here's my tax bill. I earned $280,419 last year and had Federal withholding of $61,402, New York state withholding of $23,527, and New York city withholding of $12,700. Social Security tax was $6,621 (plus the employer's share), and Medicare tax was $4,252. That's more than $100,000 on an income just barely above $250,000.

Now here's the punchline. I didn't pay nearly enough. Because part of my income was from a bonus, which is withheld at 25% instead of 35%, I have to cough up a lot more by October 15. At least $10,000 more. I'm working on the math right now. And this analysis doesn't include sales tax, property tax, or any other tax.

I usually enjoy Brad DeLong's work although we are both professional economists on opposite sides of the political fence. So I won't assume he's mendacious, just ignorant of the basics of tax rates.

What Larry misses, I think, is that at least in the rarified research-university professoriate what numbers flow through to our tax returns grossly understate how much we earn.

Put it this way: what with the furloughs, etc., I think that the flow-through from my Berkeley salary to my 1040 this year may be in the five figures--$96K.

But that's not a good measure of what I earn.

Given that I am now in my 50s, the (generous) employer health contribution is now worth at least $12K to us. Add in $30K in 403b(7) and 527 tax-shielded retirement contributions. Add in what looks to me, at my age, like a $30K employer contribution to the defined-benefit program. And add in a mortgage subsidy that is damnably difficult to value but that I think is worth an extra $25K a year.

And Berkeley does not offer anything like the educational benefits of the Chicagos or the Stanfords.

With the exception of the possibility of a (usually much less generous) employer health contribution, almost none of these tax-shielded compensation vehicles have counterparts available on any significant scale to those households at or near the American median income of $50K a year.

So do I personally earn from Berkeley this year 1.92 times median household income? Or do I earn 3.86 times median household income? I would argue for the second...

links for 2010-10-01

Fringe Thoughts -

@delong That globalrichlist.com that you link to is not trust worthy. http://www.fringethoughts.org/?p=156

– Oisin (oisingilmore) http://twitter.com/oisingilmore/statu...

(tags: from:oisingilmore)



Martin Wolf - The IMF's foolish praise for austerity

Malevolent Intelligent Cups of Yoghurt Menace Humanity!

Reflecting on University of Chicago Law Professor Todd Henderson seems to have led John Scalzi into thinking about Ayn Rand. I question his classification of the person who asked him "to share my thoughts on Atlas Shrugged with the general public" as a "friend." My advice: run and hide, people...

John Scalzi:

What I Think About Atlas Shrugged « Whatever: In the wake of the “Objectivist Jerky” crack I made earlier in the week, I was asked by a friend of mine to share my thoughts on Atlas Shrugged with the general public. I suspect this friend then went off to make herself some popcorn in preparation for the presumed inevitable mind-losing that will occur in the comments. That’s what I am to you people: cheap entertainment. Well, fine....

[I]t’s a totally ridiculous book which can be summed up as Sociopathic idealized nerds collapse society because they don’t get enough hugs. (This is, incidentally, where you can start your popcorn munching.)...

[T]he idealized world Ayn Rand has created to facilitate her wishful theorizing has no more logical connection to our real one than a world in which an author has imagined humanity ruled by intelligent cups of yogurt. This is most obviously revealed by the fact that in Ayn Rand’s world, a man who self-righteously instigates the collapse of society, thereby inevitably killing millions if not billions of people, is portrayed as a messiah figure rather than a genocidal prick, which is what you’d call him anywhere else. Yes, he’s a genocidal prick with excellent engineering skills. Good for him. He’s still a genocidal prick. Indeed, if John Galt were portrayed as an intelligent cup of yogurt rather than poured into human form, this would be obvious. Oh my god, that cup of yogurt wants to kill most of humanity to make a philosophical point! Somebody eat him quick! And that would be that...

Hoisted from Comments: Who Should Undertake the Social Function of Writing Papers in Empirical Finance?

Hoisted from Comments: d2 is amazed at the antics of the colonials:

James Fallows on the Whinging Rich, as Exemplified by University of Chicago Law Professor Todd Henderson: dsquared said...:

Good Lord.

I've occasionally said in the past that one of the great things about America is that it's a country where a person can make a six figure income while still not understanding the concept of a marginal tax rate. But I really do think that the social function of writing working papers in empirical finance probably ought to be left to those who do.

And, let it be said, the University of Chicago will tenure you with you still not understanding the concept of a marginal tax rate...

John Scalzi has a somewhat different reaction:

Tax Frenzies and How to Hose Them Down: A question in e-mail based on all the recent “rich people feeling not rich” nonsense, and the associated commentary online:

Why is it that the people freaking out the most about taxes on the rich are the ones who don’t seem to know how the tax code works?

The answer is in the question: Because they don’t know how the tax code works. The major failing seems to be an incomprehension regarding marginal tax rates, but people also seem to fall down on the matter of taxable income vs. gross income (i.e. how deductions can work for you!), how to apply tax credits, and other various and fairly basic aspects of the tax code here in the US.

If you don’t know that stuff — if you basically wander through your life thinking the government taxes all of your income based on the highest possible percentage — then I suppose it’s no wonder you freak out. But it also kind of makes you the financial equivalent of the people who think that Darwin said we are all descended from monkeys, or that the Bible says “God helps those who help themselves.” In short, it means you’re a bit ignorant. You should stop being that. It’s easily correctable. In any event, at some point in time, real live grown-ups should understand the concept of marginal rates. It’s not that difficult to grasp.

There is another answer as well, which can be paired with the above or stand on its own, and it’s that there’s a certain sort of person who believes that all taxation (or all taxation outside of one or two very specific things of which they approve) is theft. Naturally that sort of person will fly to the defense of any who bleat about their taxes being too high, even if in point of fact, the wealthy in the US are currently being taxed at historically low rates (“but they’re still too high!”).

I really don’t know what you do about the “taxes are theft” crowd, except possibly enter a gambling pool regarding just how long after their no-tax utopia comes true that their generally white, generally entitled, generally soft and pudgy asses are turned into thin strips of Objectivist Jerky by the sort of pitiless sociopath who is actually prepped and ready to live in the world that logically follows these people’s fondest desires. Sorry, guys. I know you all thought you were going to be one of those paying a nickel for your cigarettes in Galt Gulch. That’ll be a fine last thought for you as the starving remnants of the society of takers closes in with their flensing tools...

Econ 1 Pre-October 4, 2010 Midterm Review Session

*Econ 1 Pre-October 4, 2010 Midterm Review Session:

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