AS Mark Thoma echoes, Krugman writes,
1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn’t enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.
2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.
3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by “printing money”, using the central bank’s power of currency creation to push interest rates down.
4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.
Note that there are no microfoundations anywhere. Which is fine, in the sense that microfoundations do not add anything to this framework. They do not make it more rigorous, in my view, because they squeeze the economy into a GDP factory.
Of course, I have a different framework, starting with point 1. I think that the drop in spending during a recession is like the thunder that comes during a storm. The thunder does not cause the storm, nor does the drop in spending cause the recession. See may essays on PSST if you need my views in more detail.
“should”? “unnecessary”? “sometimes”? “can”?
It is an okay outlined set of hypotheses. But we knew these were the hypotheses. They still don’t know they are hypotheses.
As to Krugman 1, above:
Once you read a word “should,” or “ought,” in such dispensations, you may recognize a symptom of confirmation bias.
As to his 2:
The history of “interventions,” experiments and “constructs” to alter the periods or rates of adjustments in a society of increasingly impersonal transactions has been increases in “pain” and extensions of the periods of disruptions.
As to his 3:
He is actually describing the disruption of the function of “interest” in societies that require a stable medium of exchange for impersonal transactions.
As to his 4:
He describes the effects of “interventions” and “constructs” suggesting others to replace them.
Krugman is talking about the platonic economy and we are gods with perfect knowledge (of the future). But in the actual economy, the amount of people employed is a function of managers and firms making their best guess as to what they will need given (current and future) regulations and incentives.
Claiming that employment is wrong is claiming that you have more knowledge than the market. If the current amount of employment is not the right amount, shouldn’t a knowledgeable business be able to exploit that and make a profit.
Of course employment might be “wrong” because regulations or incentives push employment too low/high. But that doesn’t seem like a reason to implement stimulus (monetary or fiscal).
I like they way Krugman laid out the argument. It helps see where I don’t agree – right at the beginning.
A business could if it printed money, but there are laws against that.
If Volker can create thunder that results in a storm, I am fairly sure he caused it.
It is not that recessions don’t happen under inflation, but that recoveries are much swifter, and debt deflation bad. There are always changes in the economy, the point is to make them easier rather than harder.
Krugman also fails to note (but would have to realize) that given the way (old) Keynesians define “spending” and “recession”, he is engaged in a tautology.
That it appears to be true, because it is what we’ve experienced in the last 100 years is a coincidence.
But I actually take issue with number four. I know you (Arnold) discount the role of money in recessions, but I think the view that money is to an economy what biomass is to an ecosystem not only complements the PSST model, but also saves it from the coincidence criticism.
There is a subtle but fairly substantial fraud in Krugman’s (et.al.) alleged “Keynesian” remedy.
Referring to point 4:
“In that case temporary [Federal Government] deficit spending can provide a useful boost.”
That appears to be classical “Keynesian” remedy to a downturn in GDP or GDP growth rates. From point 4., “If Consumer spending and/or Investment spending seem below optimum, offset that with increased (deficit) Government spending”. That sounds conceptually reasonable, assuming of course that you actually think the U.S. economy is just a GDP factory (I don’t).
But the problem, and the fraud, is that it is critically important to ensure any deficit spending (on the part of any economic constituent, C, I, AND especially G) be employed toward an investment rather than just to prop up current consumption! And Keynes knew that. He did NOT advocate government deficit spending just for the sake of spending. He emphasized deficit spending on investment, or as stimulating private investment only – not to just (debt) fund current consumption. Note that Keynes’ “remedy” was suggested solely within the context of what he considered sub-optimality in the relationship between savings and investment in an economy.
Consider that actual “Keynesian” approach to what the U.S. Federal Government actually did as Krugman-approved “stimulus” subsequent to 2008. All the FedGov deficit spending was on elevated transfer payments – the seemingly perpetual weeks of unemployment payments, debt relief for (privately contracted) “homeowners”, auto producers, etc. etc. But the combined Federal and State [G]overnment spending on newly produced goods and services – the [G] component spending that actually counts in GDP – did not elevate at all during this so-called “stimulus” spending.
Consider also that, had the FedGov (and or Fed funded State govs) instead applied the deficit funds to actual elevated levels of purchases of newly produced (or future contracted) goods and services from the economy (“Keynesian”). Would that have not “stimulated” increased private sector job growth and [I]nvestment? For example, instead of handouts to GM, Chrysler, et.al., the deficit spending was applied to elevated purchases of U.S. and State government fleet vehicles. Ditto every other product and service the Government contracts for from the private sector each and every year – except at elevated levels. That would have qualified as “Keynesian” deficit spending.
Instead, the sole net results of FedGov deficit funded “stimulus” was twofold:
1.) A prop-up, and indeed an elevation, of [C]onsumption spending.
(A 70%-71% [C]onsumption component of GDP is historically high, not “normal”. But it’s Marvelous, in the interests of political expediency.)
2.) An enormous conversion of formerly privately contracted debt into public debt. And I mean, writ large. Also marvelous, in the interests of political expediency.
But the FedGov deficit funded “stimulus” was definitely NOT “Keynesian”.
For lack of a more appropriate descriptor, we’ll call it “Krugmanian”. (There may be other more appropriate descriptors, but I’ll leave that to the reader.)
It has been a while since I have bashed my head against Keynes, but I don’t think it is correct that Keynes said deficiet spedning had to be about invetsment. He might (and probably would have) said that it is PREFERABLE, but he would aknolwedge that any spending is better than no spending. The relevant quote is the one about buring bottles of money and digging them up again.
Baconbacon:
Heh, heh – “… bashed my head against Keynes” – how true. I’ve struggled mightily to even attempt to decipher the heavily Victorian prose used by Keynes. It’s mind-numbing.
But I was able to decipher that Keynes proffered his “recession remedy” within the context of the relationship of Savings versus Investment, not just Savings versus willy-nilly Spending (Consumption). And Keynes obviously knew that it is never, never, never a good idea to support/sustain/grow current consumption with increasing debt – for any economic constituent. Using new debt solely to support current consumption is the path to bankruptcy.
Pedro Schwartz has a good article on real the real Keynes over at econlib that illustrates my point.
Pedro is decidedly not a Keynesian, by the way. Nor am I. Although I don’t “buy into” all of Pedro’s critiques and commentary on Keynes work, there is one critique of the real Keynesian model/paradigm/whatever that Pedro emphasizes, and with which I fully agree: whatever value the real Keynesian theory has, it is solely within the context of a “closed economy”. But the same critique can be said of, say, Scott Sumner’s and other alleged “monetarists” models and theories – they are only compelling and defensible within the context of a “closed economy”.
My point is that the vast majority of self-declared “Keynesians” (Krugman, et.al.) aren’t. At best, they might be mistakenly identified as “pseudo-Keynesians” – effectively prostituting and mis-representing the real Keynesian constructs to provide a supposedly “theoretically sound” justification for their remedies, and economic policy errors.
A direct quote from the GT
“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”
Unless this quote is a fabrication (always possible on the internet) Keynes quite clearly states that government spending be not geared toward investment to provide stimulus.
Forgot the link
https://en.wikiquote.org/wiki/Talk:John_Maynard_Keynes
Baconbacon:
Heh, heh (again). Well, while I don’t specifically recall that quote from the General Theory …, it certainly sounds like Keynes and his heavily Victorian prose. (Nothing like a 30 foot long single sentence to numb the mind. But classically Victorian.) So it probably isn’t a fabrication.
But I suspect even you would agree that it is a “tongue-in-cheek” example, not to be confused with “Keynes quite clearly stating government deficit spending be NOT geared toward investment”.
Look at how much more skillful a writer Krugman is vs Thoma. PK is setting up (rebuilding) a motte, there is almost nothing “liberal” in this post, it is just “economics” so whenever he gets accussed of X,Y or Z (which he will do in many many other blogposts) he can link to this post with a *sigh*- “this is all I was ever saying, you guys are just strawmanning”
On the other hand Thoma can’t write one short paragraph without interjecting his personal views twice. Krugman can return back to this position and say “i’m not a liberal, I only follow these perscriptions and it just happens that liberal policy are better” where as if Thoma linked back his opponents would have plenty to bash him with in just a few lines.