Sunday, January 11, 2009

Are We All Keynesians Now?

Here is Gary Becker's Subtle Post offering some old school Chicago pushback against the fashionable young keynesians. Greg Mankiw also had a nice piece in the New York Times business section today. I must admit that Los Angeles is far from Washington DC. I'm not hearing any good gossip about what is really going on in elite Obama policy circles. If we could listen in as Obama's Economics Team debates the merits of different policies, what is the basis for how they "know" that a specific treatment (such as infrastructure investment or a tax cut for the lower middle-class) will be effective? What past recession experiences are relevant for today? Is the world that stationary?

The Obama Team doesn't have the time to run a field experiment to determine what works. In addition, it wants "general equilibrium impacts now! To my surprise, Paul Krugman has come out against cost/benefit analysis of public policy

"The biggest problem facing the Obama plan, however, is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts."
http://www.nytimes.com/2009/01/05/opinion/05krugman.html

So, how do we determine and debate what policies are "good" and how do we rank them?

So are academic economists "shovel ready" such that we are armed with free lunch policies that will jump start our economy, stop climate change and help to get the U.S ready for a 21st century long run economic competition with China?

I don't think so.

People tell me that they lack "confidence" , business lacks "confidence" --- nowhere in an economics textbook have I seen a "confidence" production function. At first glance, the fundamentals of the economy are pretty good. Our human capital stock is high. Our health capital stock is high.

How many people would trade their US passport for another nation's?

As all eyes turn to Washington waiting for the New President to help them, I do wonder what steps people would take now if they knew that no help was coming. Are we in a deep freeze as people and firms position themselves for the Keynesian $ that is about to flow? What fiscal stream of future taxes and inflation will be required to pay for this today?

4 comments :

Jason Snyder said...

It's bank bailout guilt. Congress bailed out wall street, but was conflicted about it because they felt like main street came up with the short end of the stick. To assuage their guilt they decided to stimulate the economy, and by golly if they are going to pave main street with gold it will be more gold than they gave wall street (775 billion stimulus > 700 billion bailout)

PrestoPundit said...

Let's all get used to it.

It's cargo cult economics all the way down.

The shamans are in charge -- and their fake view of "science" and their anti-economic view of economics rules the roost.

Things aren't changing any time soon.

Michael J Roberts said...

Matthew:

When I teach macro to undergraduates I tell them that "lack of confidence" in the Keynesian model is shift in the demand for money.

When savers stop trusting markets, they hoard cash, interest rates on risky assets goes up, investment and consumption go down, and the economy goes into recession.

That's pretty much the problem we have. And I think it's fair to say 'lack of confidence' is pretty central to it.

You should know this.

Steve Loebs said...

Michael Roberts wrote:

"When savers stop trusting markets, they hoard cash, interest rates on risky assets goes up, investment and consumption go down, and the economy goes into recession.

"That's pretty much the problem we have. And I think it's fair to say 'lack of confidence' is pretty central to it."


What do yo mean by "...stop trusting markets..."?

The Post-Keynesians consider themselves the guardians of the true Keynesian ideas and the many other neo-Keynesian forks as bastard Keynesians! Your description of Keynesianism that you are teaching your students is of the bastard form. You have the independent and dependent variables mixed up.

What's more, your description of recent events is surprisingly inaccurate. Mr. Roberts, savers have not been hoarding cash, they have been forced to de-leverage. The saver has not been leading these events, they have been trailing.

If Lord Keynes were alive today, he would say that a long-term period of savings leaks has been the cause of our current problem. He would say that a badly skewed distribution of income has caused savings leaks that have been patched with an over-reliance on consumers borrowing to provide the purchasing power that their income has failed to provide.

He would then go on to say that once the credit market reached its capacity to lend to the consumer, that the inevitable decline in new lending began.

If Hyman Minsky were alive today, he would say that once the last stage (aka the Ponzi stage) of the credit market was reached, that the current events are unavoidable. This has nothing to do with consumer confidence or investor confidence. That confidence falls AFTER the credit market freeze occurs.

You should know this.