If you’re in Manhattan or have access to an internet connection tomorrow (Nov. 8), Reuters is sponsoring a Keynes vs. Hayek debate between two teams of economists and writers, including the Levy Institute’s James Galbraith.
“Four Keynesians – economist James Galbraith, son of the high priest of Keynesianism, John K. Galbraith; New Yorker columnist John Cassidy, Sylvia Nasar, the historian of economic thought and author of Grand Pursuit; Steve Rattner, the architect of Obama’s auto company bail-out – will slug it out with four Hayekians – Economics Nobel Prize-winner Edmund Phelps; Professor Lawrence H. White of George Mason University; Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute; and Stephen Moore of the Wall Street Journal.”
The debate will be hosted at the Asia Society (5:00-7:30 pm) and can be viewed live online here.
The Levy Institute’s Pavlina Tcherneva delivered a campus-wide lecture at Bard College yesterday that discussed the Federal Reserve’s policy actions during the crisis and the future of government stabilization policy. The lecture also covered some of the themes in her working paper “Bernanke’s Paradox” (written roughly a year ago), which also appeared in the Journal of Post Keynesian Economics.
In the context of noting Bernanke’s increasingly urgent calls for more help from fiscal policy, it’s worth highlighting this portion of the working paper:
The second key implication of Bernanke’s non-orthodox approach to monetary policy is that, not only is fiscal policy effective (something rejected for decades by neoclassical advocates of the Ricardian Equivalence Hypothesis), but it is, in fact, more potent in recessions. This is because the mainstream has finally recognized that the Fed cannot alone and unilaterally rain money on the banking system … More importantly, from Bernanke’s new interpretation of monetary easing, we can extract one interesting new conclusion, namely that the Fed cannot exogenously expand the money supply without government spending. What this means is that, even if the Fed lent against a wide variety of assets, it may be able to prevent a sell-off or to put a floor on these asset prices, but it will not be able to boost aggregate demand. The only way to do this, according to Bernanke, is via a “gift” from government spending, namely through an injection of net financial assets (net wealth) from fiscal operations.
This is a great graphic put together by Kevin Drum, who calls it “The Ben Bernanke Congress-ometer” (go read the original post for context):
Remember: Ben Bernanke was appointed by George W. Bush. Prior to that he headed Bush’s Council of Economic Advisers. For all intents and purposes, he’s a Republican. It’s interesting to note that, (1) unlike his fellow Party members, Bernanke’s job prospects do not directly hinge on stagnant growth and incomes (in fact, if you listen to the GOP debates, re-election of the current incumbent might provide Bernanke with more job security), and (2) unlike most of his fellow Party members, Bernanke seems not to have abandoned, sometime around January 2009 (a date whose significance escapes me for the moment), the belief that fiscal policy can stimulate growth.
[The following is the text of Senior Scholar Randall Wray’s presentation, delivered October 28, 2011, at the annual conference of the Research Network Macroeconomics and Macroeconomic Policies (IMK) in Berlin. This year’s conference was titled “From crisis to growth? The challenge of imbalances, debt, and limited resources.”]
It is commonplace to link Neoclassical economics to 18th or 19th century physics with its notion of equilibrium, of a pendulum once disturbed eventually coming to rest. Likewise, an economy subjected to an exogenous shock seeks equilibrium through the stabilizing market forces unleashed by the invisible hand. The metaphor can be applied to virtually every sphere of economics: from micro markets for fish that are traded spot, to macro markets for something called labor, and on to complex financial markets in synthetic CDOs. Guided by invisible hands, supplies balance demands and all markets clear.
Armed with metaphors from physics, the economist has no problem at all extending the analysis across international borders to traded commodities, to what are euphemistically called capital flows, and on to currencies, themselves. Certainly there is a price, somewhere, someplace, somehow, that will balance supply and demand—for the stuff we can drop on our feet to break a toe, and on to the mental and physical efforts of our brethren, and finally to notional derivatives that occupy neither time nor space. It all must balance, and if it does not, invisible but powerful forces will accomplish the inevitable.
The orthodox economist is sure that if we just get the government out of the way, the market will do the dirty work. Balance. The market will restore it and all will be right with the world. The heterodox economist? Well, she is less sure. The market might not work. It needs a bit of coaxing. Imbalances can persist. Market forces can be rather impotent. The visible hand of government can hasten the move to balance.continue reading…
At Eurointelligence, Rob Parenteau digs into a recently-leaked “Troika” (the IMF, European Central Bank, and European Commission) document that discusses the outlines of a Greek debt restructuring deal. Among the revelations Parenteau extracts from the document is evidence of a growing willingness to concede that fiscal consolidation is not expansionary. As Parenteau comments:
In 2009 and 2010, citizens across the eurozone were sold large, multi-year tax hikes and government spending cuts on the idea that [expansionary fiscal consolidations] are commonplace and achievable, and besides, balanced fiscal budgets are a sign of prudence and moral purity. In fact, a closer inspection of history suggests fiscal consolidation will tend to be expansionary only under fairly special conditions, namely when accompanied by a) a fall in the exchange rate that improves the contribution of foreign trade to economic growth, and b) a fall in interest rate levels that improves interest rate sensitive spending by households and firms.
Notice that neither of these special conditions are automatic, and neither of them have been present in the eurozone of late.
Read the whole article, including a link to the leaked document, here.
Ryan Avent digs into the latest GDP numbers at Free Exchange and lays out a set of facts that ought to be drilled into the heads of the public and every opinion-maker: fiscal policy, particularly when you factor in state and local governments, has basically been either null or contractionary for almost two years now.
Federal government spending contributed positively to growth, as an increase in defence spending offset cuts on the non-defence side of the ledger. That positive federal contribution, in turn, offset continued contraction at the state and local government level. All told, the government contribution to output was essentially nil. Government consumption has contributed positively to growth in just 2 of the last 8 quarters. Non-defence federal government spending has contributed positively to growth in just 1 of the last 5 quarters. Generally speaking, fiscal policy has not been stimulative in nearly two years and has been clearly contractionary for the past four quarters. That’s a remarkable situation to contemplate given the rock bottom rates on Treasuries.
Truly remarkable. Multiplier Effect recently featured a couple of posts pointing to Levy scholars arguing that aggregate demand management and short-term stimulus are inadequate to the challenges we’re facing. It’s important to emphasize, however, that this does not mean the near-term fiscal position is irrelevant. The status quo, for some time now, has not been marked by fiscal stimulus of any kind. This economy needs more demand and the federal government has more than enough fiscal room to provide it; the fact that we may need a lot more than merely short-term stimulus does not detract from this point.
James Galbraith, interviewed by Henry Blodget, suggests that more “stimulus,” if this means a program that will run out in a couple of years, is not sufficient. What we need, he insists, is something more like a “strategic plan” for the next 10-15 years, investing in growth and dealing with problems like energy, climate change, and infrastructure (and that laying this groundwork would ultimately shore up private sector confidence). Galbraith is also careful to distinguish between concerns about private and public debt: while private, household debt has been a problem for the US, he argues, the public debt is sustainable and should not be a concern. His closing line is worth repeating: “We’re a big country. We can finance our own reconstruction if we choose to do so.”
Here’s one fairly standard reading of our economic policy challenge: the economy needs more pump priming, the federal government has more than enough fiscal space to provide it, but for political reasons it won’t be forthcoming. (If you needed further evidence of that last proposition, take a look at the latest House Republican job creation offering: repealing a law designed to prevent tax evasion by federal contractors, paid for by kicking some seniors off of Medicaid. Take a moment to gape at the boundary-probing cynicism. This is the legislative equivalent of planting a giant foam middle finger on the White House lawn.) So as far as aggregate demand goes, in other words, there’s little reason to think that the federal government will step into the breach (and as things stand, we expect the government to be withdrawing demand from this economy). But a new one-pager by Pavlina Tcherneva (“Beyond Pump Priming“) suggests that the above reading of the situation is … too optimistic.
Even if the AJA, or some other form of aggregate demand injection is passed, there are serious limitations to relying too heavily on an approach that boils down to boosting growth and hoping for the right employment side effects. Featuring a rather stark graph portraying the ratcheting up of long-term unemployment over the last several decades, the piece argues that there are shortcomings to relying too exclusively on pump priming (which is largely what the AJA is, aside from a small amount of infrastructure).
The alternative is to take dead aim at the employment outcomes we need—to directly target the unemployed. Tcherneva explains why, instead of just trying to fill the demand gap for output, we ought to focus on closing the demand gap for labor, through public works and job guarantee programs that directly employ the unemployed. Among the benefits of the latter approach are an ability to focus on particularly distressed regions of the country.
Rob Parenteau has a post at Naked Capitalism commenting on Wolfgang Münchau’s article in the Financial Times. Münchau argues that policy makers in Europe largely ignored the spillover effects of simultaneous fiscal contraction across the entire eurozone. Parenteau insists that, at least at the level of ideas, the problem occurs at a much more basic level:
…while this pursuit of simultaneous, multi-year fiscal consolidation can only thwart itself by dragging down growth and dampening tax revenues, thereby leading perversely to still higher public debt outstanding, the problem does not lie so much in failure of policy makers to recognize and take into account the interactive effects of fiscal consolidation across countries. Rather, the truth of the matter is that most of the eurozone policy makers and their erstwhile economic advisors are practicing a faith based economics. They believe in the moral purity of balanced fiscal budgets. They also believe private sector activity will pick up to more than compensate for public sector cutbacks. That is the essence of the Ricardian Equivalence Theory, which is a central theoretical proposition that mainstream economists believe in and teach every graduate student to parrot.
That said, I think Munchau is being too kind here. European leaders and institutions by and large didn’t even get to the point of devising policies that might have worked in a small open economy. Instead, they went in for fantasy economics, believing that the confidence fairy would make fiscal contraction expansionary.
Parenteau points to presentations he delivered at the Levy Institute’s Minsky Conference in which he assailed this idea of “expansionary contraction” (the idea that deficit-cutting can boost growth) from the standpoint of the financial balances approach. In his 2010 presentation, Parenteau regrets that the sectoral balances approach, typified by the work of Wynne Godley, hasn’t caught on more in the mainstream—though in journalism he notes the occasional exception from Martin Wolf in the Financial Times (see Wolf’s latest column for just such a flirtation with the financial balance approach. The heterodox flavor of Martin Wolf’s writing is quite striking, as noted previously.)
You can hear the audio for Parentau’s 2010 presentation here (see Thursday, Session 4); the slides for the presentation are here.
The bowling alley cannot run out of points, and the US government cannot run out of keystrokes. Research Associate Stephanie Kelton slaps down the folk wisdom that there is nothing the government can do about unemployment because it’s “broke.” “We don’t understand our own monetary system.”
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