Raghu Rajan nails it

by on May 3, 2012 at 4:13 am in Economics | Permalink

The industrial countries have a choice. They can act as if all is well except that their consumers are in a funk and so what John Maynard Keynes called “animal spirits” must be revived through stimulus measures. Or they can treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades and thus put themselves in a better position to take advantage of coming opportunities. For better or worse, the narrative that persuades these countries’ governments and publics will determine their futures—and that of the global economy.

Every paragraph of his piece is excellent, and as I like to say “We are all stagnationists now.”  Hat tip goes to The Browser.

Boson May 3, 2012 at 4:54 am

“Leaders should worry about the accumulated debt later, once their economies have picked up again.
This narrative—the standard Keynesian line, modified for a debt crisis—is the one to which most Western o⁄cials, central bankers, and Wall Street economists subscribe today.”

In what parallel universe where the massive austerity measures never happened is this guy living in? Hard to take anything after that seriously. Only at Booth…

Ray Lopez May 3, 2012 at 6:36 am

I think you ar e parsing his prose too much–what he says made sense to me. Words are not math so you’ll have some ambiguity in every paragraph, including this one.

AbeFroman May 3, 2012 at 9:18 am

This isn’t a UChicago thing… It’s a common sense thing. Who do you propose finance future stimulus in Europe? These nations have huge debts and aren’t growing. Are you willing to lend them $300 billion on top of their existing financial situation?

I find these “austerity isn’t working arguments” appalling. 18 months of austerity (and not even very tight austerity at that ) was never going to solve this. It’s going to take years to see returns on austerity… and its the only option unless Germany is willing to subsidize 40 layers of Italian government bureaucracy and Greek hairdresser pensions.

I understand if you’re arguing that Spain should just leave the Euro. But then you ought to say it. Otherwise, there is no alternative. The international debt market will not support government stimulus in Europe.

L. F. File May 3, 2012 at 9:31 am

But austerity seems only to be making things worse. How is a longer period of declining wealth and income for poor people supposed to make rich people whole?

lff

Anon. May 3, 2012 at 9:46 am

It’s short term pain for long term gain. You cut current GDP because you cut government spending, but in return you get higher long-term growth. The alternative is to wallow in the middle, with only a few cuts now and not enough reforms to boost growth significantly, which is what Europe is choosing to do for public choice reasons.

Andrew' May 3, 2012 at 9:51 am

How do you know anything would work? I’m sure politicians are capable of mucking up austerity too, but maybe austerity is just rearranging the deck chairs on the Titanic. Maybe the time to be Keynesian was the time when it could have mattered.

Andrew' May 3, 2012 at 10:28 am

Or another way of putting it is that by borrowing half the budget over the last several decades a kind of secular Keynesianism has already been tried.

L. F. File May 3, 2012 at 12:05 pm

Current experience in the EZ and elsewhere seems contraindicitave. You will have to point me to the historical record that demonstrates austerity causing growth. All the ones that I am aware of cause economic contraction.

lff

TallDave May 3, 2012 at 12:28 pm

There is a quite a lot of evidence that less government spending correlates with higher growth.

http://mercatus.org/publication/does-government-spending-affect-economic-growth

More government does not lead to more growth. Which is exactly what we should expect: incentives matter!

TallDave May 3, 2012 at 12:41 pm

In making the Keynesian argument, proponents tend to equate an accounting identity with a beneficial economic effect: yes, you can make GDP look larger and unemployment lower by hiring workers to dig holes and fill them in again, but misallocation always has a long-term cost, yes even at low interest rates. It’s the fiscal version of the broken windows fallacy.

L. F. File May 3, 2012 at 5:25 pm

TALLDAVE:”There is a quite a lot of evidence that less government spending correlates with higher growth.

http://mercatus.org/publication/does-government-spending-affect-economic-growth

More government does not lead to more growth. Which is exactly what we should expect: incentives matter!”

Apparently you are more convinced than your reference.

from your ref: “Though a large portion of the literature finds no positive correlation between government spending and economic growth, some empirical studies have. For example, a 1993 paper by economists William Easterly and Sergio Rebelo looked at empirical data from approximately 100 countries from 1970-1988 and found a positive correlation between general government investment and GDP growth.”

But we are actually talking about austerity promoting growth.
Krugman provides a nice chart and discussion here:
http://krugman.blogs.nytimes.com/2012/04/24/austerity-and-growth-again-wonkish/

lff

TallDave May 4, 2012 at 7:53 am

They also say:

“Government spending, even in a time of crisis, is not an automatic boon for an economy’s growth. A body of empirical evidence shows that, in practice, government outlays designed to stimulate the economy may fall short of that goal. Such findings have serious consequences as the United States embarks on a massive government spending initiative. Before it approves any additional spending to boost growth, the government should use the best peer-reviewed literature to estimate whether such spending is likely to stimulate growth and report how much uncertainty surrounds those estimates. These analyses should be made available to the public for comment prior to enacting this kind of legislation.”

Krugman looks at two years. Essentially he is measuring an accounting identity, as I noted proponents often do.

Again, it’s not austerity, it’s solvency.

Gerard May 4, 2012 at 1:45 pm

One minor pushback and talldave changed his argument.

TallDave May 4, 2012 at 2:47 pm

No, my argument is exactly the same: less government spending correlates with higher growth.

Steven Kopits May 3, 2012 at 5:27 pm

Interestingly, I am under the impression the upper income folks are taking it on the chin.

In Princeton, a town of some 40,000 people, there are 120 homes for sale above $1.2 million. It’s scary to drive around the area, it’s like it was last spring. Many, many for sale signs in the best areas.

But really only on expensive homes. For normal homes (which in Princeton means anything less than, say, $850,000), there is limited inventory and relatively few for sale signs. The normal, middle class areas seem entirely stable. No visible distress there.

L. F. File May 4, 2012 at 2:40 pm

“…government should use the best peer-reviewed literature…”

Yes they say that. And then they quote the 1993 paper that found a positive correlation between general government investment and GDP growth.

Would they really hedge their position so severely if they had much faith in it?

Krugman uses recent data but he has also frequently shown the lack of a positive relationship between growth and austerity in 90′s Japan and the U.S. in 1930, 1937 and others.

You guys keep hollering “accounting identity” but fail to provide much evidence of contraction causing expansion.

lff
lff

TallDave May 4, 2012 at 5:34 pm

It’s pretty ridiculous of you to just ignore the other 90% of the link in favor of the one point that supports your argument, and then claim we haven’t provided evidence.

An NBER paper that analyzes a panel of OECD countries found that government spending also has a strong negative correlation with business investment.12 Conversely, when governments cut spending, there is a surge in private investment. Robert Barro discusses some of the major papers on this topic that find a negative correlation between government spending and GDP growth.13 Additionally, in a study of 76 countries, the University of Vienna’s Dennis C. Mueller and George Mason University’s Thomas Stratmann found a statistically significant negative correlation between government size and economic growth.14

1990s Japan? You mean, the biggest failed experiment in Keynesian stimulus ever?

Ever heard of China? Communism generally? Hong Kong?

TallDave May 4, 2012 at 5:41 pm

A business has a plan in which it invests $10M its first year, $10M its second year, and then in years 3-10 they reap $50M/year in revenue from these investments.

Krugman’s analysis: the business plan was a failure, they lost $20M in years 1 – 2.

TallDave May 3, 2012 at 10:29 am

It isn’t austerity, it’s solvency.

If you think we’d be better off without functioning credit markets..

L. F. File May 3, 2012 at 12:06 pm

Where is the evidence (i.e. confidence fairy on strike)?

lff

TallDave May 3, 2012 at 12:12 pm

The bond markets have spoken pretty clearly on the matter.

Phill May 3, 2012 at 2:37 pm

I’m weary of Greeks bearing gifts and random events bearing narratives.

TallDave May 3, 2012 at 3:38 pm

Indeed, I’ve always found the long-term arguments against solvency somewhat incoherent. Logically there must either exist some level of spending at which a country would be solvent, else their debt is unpayable meaning their prior spending was unsustainable anyway, unless the assumption is debt can rise significantly faster than GDP forever, which seems trivially false.

JWatts May 3, 2012 at 4:40 pm

“Indeed, I’ve always found the long-term arguments against solvency somewhat incoherent.”

+pi

L. F. File May 3, 2012 at 5:11 pm

Not sure where you are getting this. Spain just got downgraded by S&P, Greek bonds are over 22%, Portugals at 13% and even the PIIGS that are off their highs are seeing rates rise again.

lff

TallDave May 4, 2012 at 7:47 am

Exactly, the bond markets are saying they see a high risk of insolvency. The bond markets are definitely not saying “Hey, maybe you should be borrowing and spending even more.”

L. F. File May 4, 2012 at 2:51 pm

TallDave: ” Exactly, the bond markets are saying they see a high risk of insolvency. The bond markets are definitely not saying “Hey, maybe you should be borrowing and spending even more.”

Are these countries showing the slightest sign the austerity has helped? No, just the opposite. Confidence now is even worse than before they started the drastic budget cutting. 19th century economics just like 19th century medicine – bleed the patient till he recovers!

lff

TallDave May 4, 2012 at 5:23 pm

Of course there’s a sign — under the old regime they would have been cut off entirely by the bond markets by now.

Is the risk of insolvency still high? Of course. Is there short-term pain from reducing gov’t spending? Of course, this is an accounting identity.

The gov’t spending is what’s bleeding their debt ratings. The solution is not to open an artery.

TallDave May 4, 2012 at 5:52 pm

I’m curious, do you really think there is no level of gov’t spending at which these countries can be solvent? If so, how was their even higher pre-solvency-measures spending sustainable?

The only alternative to solvency is moneyprinting/devaluation. That makes everyone poorer, so the Germans (who are solvent) won’t go for it. So (as PK noted the other day) if they want to print money or devalue, they will have to go back to their sovereign currency, and make everyone poorer.

viv gov May 9, 2012 at 4:40 am

What massive ausrerity measures are you talking about? Other than a few countries in Europe who has actually cut spending, not the US. Lots of talk certainly but no cuts yet.

Ray Lopez May 3, 2012 at 6:32 am

Raghu Rajan only nailed it in the one paragraph Tyler quotes; otherwise he wrote a rather staid and conventional “supply side solves all” piece. From what I understand of Keynes and his followers (which I am not), they argue that “in the long run” (which is the supply side) we are all dead, and it does no good to forecast calm seas in the future when there’s a hurricane now. So “education” as a panacea for our woes won’t cut it with the Keynesians (takes too long to work). They want to use “money illusion” to force people to artificially spend and create demand, which short term restores the status quo (but long term does nothing). Money illusion does work in a laboratory setting so they do have evidence on their side. Long term however, I say we are in for a hard landing. Small wonder that this *#* geologist/mathematician sees a singularity (a hard landing) forming around 2050–based on how earthquakes form–and yes, there’s probably a nexus between how our economy works and how earthquakes form, both being non-linear and perhaps sharing the same math properties.

*#* Why Stock Markets Crash: Critical Events in Complex Financial Systems – Didier Sornette

Doc Merlin May 3, 2012 at 7:52 am

2050? That far away?
I’m a fan of Didier’s work. My austrian friends are saying its gonna be sooner than that. I wonder.

L. F. File May 3, 2012 at 9:38 am

Yes! Rajan pins a lot of hope on education but fails to explain why the educated workers productivity gains would not mostly accumulate to the already rich and just make income inequality worse. After all that is what has been happening for the the last 30 years.

lff

Andrew' May 3, 2012 at 9:53 am

Well that’s not education is it. That is the thing that passes for education that people like me constantly complain about.

Uninformed Observer May 3, 2012 at 11:11 am

Indeed. Rajan is getting at the real flaw in supply-side spending, which is the neglect of a real value transaction in employment. Education is meaningful if the educated worker is able to produce value commensurate with his education. Manufacturing automation, IT and pharma show this. For much of the West, though, education has been merely signaling, as credentialed workers (largely in the public sector, but not exclusively) consume high salaries but produce little of worth that can be transmitted through the rest of the economy.

As the so-called higher education bubble bursts, if we see an emergence of an educational model that encourages actual skill learning without the implicit stratification of the old model, we may get some of the widespread benefits Rajan is talking about.

L. F. File May 3, 2012 at 12:14 pm

My point was that Rajan must be anticipating productivity gains from education. However, even it he is right there is no evidence that the employees will benefit much from the gains since experience of the last 30 or so years shows the gains going to employers.

lff

Cliff May 3, 2012 at 10:42 am

Educated people make more money

dead serious May 3, 2012 at 11:36 am

Professional baseball players make more money.

Andrew' May 3, 2012 at 11:40 am

Exactly.

If there were only one job in the country, the most educated guy from Harvard would get it, he’d make a ton of money. What he actually learned in his education may or may not matter.

Then there is the kind of education that teaches real things that you can use to serve customers and other people learn to serve you.

msgkings May 3, 2012 at 12:55 pm

Most of which is learned by doing, on the job, and by mentoring. Except in rare cases education is SUPPOSED to be about signalling. It signals to employers who’s got the drive and brains to be trained.

Fred Flintstone May 3, 2012 at 2:01 pm

“Educated people make more money”

Of *course* they do. I don’t understand why people can’t see that.
Here’s one example of how educated people make more money:

Mervyn King (BA from Cambridge) made £325 billion at the Bank of England.

Ben Bernanke (PhD from MIT) made $2.5 billion at the Fed.

Boy, if only Mervyn had got that advanced degree, I’d be rich like my
American cousins.

Adrian Ratnapala May 3, 2012 at 3:14 pm

It seems that Mervyn was earning American billions while Ben was earning British ones. Or perhaps Ben made trillions.

Steven Kopits May 3, 2012 at 5:31 pm

Rajan makes some comment about not investing enough in education. Here are some enrollment numbers:

Enrollment in degree-granting postsecondary institutions increased by 9 percent between 1989 and 1999. Between 1999 and 2009, enrollment increased 38 percent, from 14.8 million to 20.4 million. Much of the growth between 1999 and 2009 was in full-time enrollment; the number of full-time students rose 45 percent, while the number of part-time students rose 28 percent. During the same time period, the number of enrolled females rose 40 percent, while the number of enrolled males rose 35 percent. Enrollment increases can be affected by both population growth and rising rates of enrollment. Between 1999 and 2009, the number of 18- to 24-year-olds increased from 26.7 million to 30.4 million, an increase of 14 percent, and the percentage of 18- to 24-year-olds enrolled in college rose from 36 percent in 1999 to 41 percent in 2009. In addition to enrollment in accredited 2-year colleges, 4-year colleges, and universities, about 472,000 students attended non-degree-granting, Title IV1 eligible postsecondary institutions in fall 2008.

http://nces.ed.gov/fastfacts/display.asp?id=98

L. F. File May 3, 2012 at 6:48 am

A few of my favorite pieces from this article:
[from the opening paragraphs]
“…And the massive fiscal deficits in Europe, as well as the European Central Bank’s tremendous increase in lending to banks, suggest that it is not for want of government stimulus that growth is still fragile there.”

The deficits and the lending are because of huge revenue drops and automatic social safety net costs NOT stimulus spending!

[from Disrupting the Status Quo section]
“…it is not hard to find the pliant board overpaying the underperforming CEO—but most are simply elections of the value of skills in a competitive world.”

Is he really glossing over Enron, Worldcom, MFGlobal, Bear Stearns, AIG, Lehman, etc. with this?

[from the last paragraph and above]
“…Or they can treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades …”

It seems to me what has been “papered over” are the pieces of Keynesianism that would be most useful in the current situation. And the papering was done by Rajan’s friends.

lff

Cliff May 3, 2012 at 10:45 am

What pieces would those be?

And what do AIG, Lehman, Bear Sterns etc. have to do with CEO pay?

L. F. File May 3, 2012 at 12:25 pm

If the CEO’s/top management were competent – i.e. were worth their compensation – why did they go broke or need to be bailed out by the USG? These were board overpaying their management. An apparently rare occurrence according to Rajan. No mention of how it could be rare and yet still catastrophic for the economy.

lff

Steven Kopits May 3, 2012 at 5:36 pm

The Great Recession was not about bad management. It was about something much bigger. Why did so many countries go down? It’s because returns were depressed, which allowed asset bubbles to form.. Where did the liquidity comes from to depress returns? Not the US, else there would have been inflation there. No, there are really only two possible suspects: China and OPEC petrodollars. The Great Depression is the flip side of the rise of China.

Jult52 May 3, 2012 at 7:20 pm

Steve – Do you elaborate on this idea anywhere? (Such as your blog?). Wasn’t one of the sources of capital expanding bank balance sheets, to provide a third source?

Tom May 3, 2012 at 7:36 am

False choice. Both politically and policy-wise, the path to overhauling the economy and its structural problems requires smoothing out the pain of unemployment and not letting decreased demand fed by unemployment feed on itself. The situation needs to be managed, and many investments for the future can also help alleviate pain in the present.

Doc Merlin May 3, 2012 at 7:55 am

so much fail density in that paragraph.

Ranjit Suresh May 3, 2012 at 8:06 am

Rajan unfortunately perpetuates the elites fantasy that the U.S. can solve its growth and deficit problems with education and retraining of the workforce for skilled, creative labor. Most of the people making this argument have unusually high IQ’s. No amount of athletic training is going to make to convert the masses into world class sprinters or Double-A pitchers. The same is true with education – does Rajan really look at the masses of people who voted in the Iowa caucuses or who rallied for Obama in Grant Park on election night and think, “These people could all work in IT.”?

I also think it’s interesting that he seems to believe that while Europe needs to reform and deregulate, the U.S. has basically taken care of these issues. Yet, he simultaneously writes in defense of CEO salaries that pay for doctors and lawyers have also skyrocketed. Well, yes, in part because those industries are tightly regulated.

john personna May 3, 2012 at 9:39 am

For what it’s worth, Can You Make Yourself Smarter?

It’s the old dumb-beautify / smart-ugly, correlation / causation, thing.

Cliff May 3, 2012 at 10:47 am

Lawyer salaries have only increased at the top. Overall they have gone down, I believe, and in fact the regulation of lawyers is very loose. I only wish the ABA did as good of a job as the AMA (selfish reasons only, of course)

Ranjit Suresh May 3, 2012 at 11:08 am

No legally mandated credentialed profession can be said to be loosely regulated.

Michael Cain May 3, 2012 at 10:54 am

“…does Rajan really look at the masses of people who voted in the Iowa caucuses or who rallied for Obama in Grant Park on election night and think, “These people could all work in IT.”?”

And where in IT would they work, anyway? Unless economists are willing now to argue that the sharp declines in enrollment in computer science programs across the country are happening despite a glut of stable, well-paying jobs in the field? A field for which, if various studies are to be believed, there are already a considerable number of workers aged 45+, with years of experience, who have lost an IT position and are unable to find another.

TallDave May 4, 2012 at 10:07 am

Unless economists are willing now to argue that the sharp declines in enrollment in computer science programs across the country are happening despite a glut of stable, well-paying jobs in the field?

That’s exactly what we’ve observed. It’s why IT departments are staffed with such a large proportion of people from other countries. The incentive here in the U.S. to study things that are hard have diminished — we are increasingly susbsidizing nonwork and taxing work. Also, tuition is overpriced right now, and you can learn to code without taking on $100K in debt — few fields are as friendly to online learning as IT.

a considerable number of workers aged 45+, with years of experience, who have lost an IT position and are unable to find another.

Depends what their experience is in; years of experience in obsolete tech can be a career millstone. You need to be marketable.

Bender Bending Rodriguez May 3, 2012 at 10:13 pm

does Rajan really look at the masses of people … and think, “These people could all work in IT.”?

I’d argue that long term, seeing IT as a career field is a dead end. The real gains aren’t sending people into IT, it’s giving them just enough IT education so that they can bring the benefits of IT
to whatever field they’re in.

TallDave May 4, 2012 at 9:54 am

BBR — only true if IT does not increasingly replace labor. That has been the trend and it will probably continue.

RPLong May 3, 2012 at 8:12 am

People need to realize that the way forward is not the crafting of some kind of “remedy to the crisis.” We don’t need a “remedy,” we need sound institutions and open-market policies. And it wouldn’t hurt to end all those foreign wars, either.

E. Barandiaran May 3, 2012 at 8:22 am

Tyler, at best you have read the paragraph you quote. Actually, it’s the article’s last paragraph. It’s a good paragraph to highlight that as usually, to get out of a crisis people have to choose between an easy way and a hard one. In the current economic crisis, the easy one is to assume that the crisis is just a collapse of aggregate demand AND that governments CAN inflate aggregate demand at a low cost. The hard one is to assume that the advanced economies have been failing (a) to adapt to changes in the global economy in the past 30 years and to make things worse to large changes in their own populations, and (b) to reverse their own policies leading to stagnation and unsustainable debt levels, AND that the rules of the political game will have to change for a marginal revolution to happen. Unfortunately, in the 12 pages leading to the concluding paragraph, Rajan presents a large number of vague ideas that contribute little to understand the nature of the crisis and why one choice is easy and the other one hard. I’d rate the article as a poor summary of current knowledge about the crisis.

L. F. File May 3, 2012 at 9:45 am

The problem is recovery is being implemented as the hard way for the poor debtors and the easy way for the rich creditors. This can work as long as their are somewhat equal numbers of both but when 1% get the easy way and 99% get the hard way social stability cannot help but suffer.

lff

Cliff May 3, 2012 at 10:48 am

How so?

Dale May 3, 2012 at 10:02 am

E. Barandiaran
Glad to see you back and contributing – I almost gave up on reading MR in your absence. As usual, you are right on target.

Michael G Heller May 3, 2012 at 12:23 pm

Me too. Welcome back E. Barandiaran. I missed you!

Roy May 3, 2012 at 2:07 pm

Exactly

Mike Huben May 3, 2012 at 8:23 am

“We are all stagnationists now.”

“We”, white man? It looks to me as if you had to go to the U. of Chicago to find somebody who agrees. An immodest riff, comparing your importance to Keynes’.

pmp May 3, 2012 at 9:32 am

Is Mike Huben America’s Greatest Troll? Can his greatness be monetized? If so, we should definitely distribute them with a preference to the poor.

Andrew' May 3, 2012 at 10:38 am

TC may not be as “great” as Keynes, but he’s greater than any living Keynesians.

Living Keynesians seem to think that stimulus is like “more cowbell,” the answer to everything.

If they were to use a little imagination and figure out the one time stimulus might not be the answer…oh nevermind. Here’s a hint, it’s now.

Mike Huben May 3, 2012 at 11:14 am

Andrew, are you in the Sycophant Olympics?

Let me know when Tyler gets his Nobel [...] Prize.

All I’m doing is pointing out Tyler’s puffery, which is quite misleading. TGS is a forgettable work whose argument is based on the trick of confusing mean with median. The median has stayed much the same, but the mean has increased. No stagnation. Only ideologues and the foolish would be taken in.

Andrew' May 3, 2012 at 11:21 am

Mike,

I’m not an economist (thank god). But in my estimation if TC proved technology was extra-economical and used some fancy math to do it that would be both the most important economics contribution as well as probably politically preclude him from the Nobel.

Now what do you think I think of the Nobel prize as the proxy for importance?

Andrew' May 3, 2012 at 11:23 am

And here’s what you will never get, by rights I should despise TC.

jimi May 3, 2012 at 11:48 am

Andrew, we should party sometime.

careless May 3, 2012 at 6:31 pm

I’m trying to imagine Krugman as Walken saying “I’ve got a fever, and the only cure is more stimulus”

It’s not working.

Beefcake the Mighty May 3, 2012 at 2:33 pm

It’s worth pointing out that Mike Huben is NOT white.

Tom May 3, 2012 at 8:26 am

Tyler, you fail to note the paragraph that quotes you:on low-hanging fruit for faster economic growth.

Both you and he fail to note that as gov’t consumes an ever greater amount of GDP, the amount of actual positive rate of return investment dollars goes down.

While I still haven’t read your TGS book yet, I wonder if it mentions gov’t investment in roads? Since WW II, perhaps even before, road building has been one of the few gov’t investments that has a positive rate of return.

Raghu doesn’t quite come out with the awful truth about “stimulus” — US & EU gov’t spending was already at an unsustainable over-stimulation level during most of the last 15 years–there should have been larger surpluses to reduce US debt before the dot.com bubble pop, and there have been less gov’t spending under Bush II (tho the tax cuts were pretty good).

When the gov’t is already over-spending at some 110% level or so during the “good times”, there’s no easy increase available.

He makes a great point about the lack of moderate skill, moderately easy, good paying jobs that are disappearing … except maybe in gov’t.
Policy response: make top gov’t jobs half-time jobs, at half-wages, and hire more unemployed into gov’t jobs.
I can easily imagine twice as many gov’t workers working part time.

Such a policy would reduce, without solving, the jobs problem; but it would likely push the “best” people out of gov’t, and back into the peaceful private market, where they can do more (invisible hand) good deals.

Rahul May 3, 2012 at 9:58 am

How does one calculate the RoR on government road building?

dead serious May 3, 2012 at 11:44 am

Why push them into the private market when they could be busy doing high value work like road building?

Tom May 3, 2012 at 9:01 am

Fine, except he doesn’t need to start the third sentence with “Or”.

figleaf May 3, 2012 at 9:08 am

“They can act as if all is well except that their consumers are in a funk and so what John Maynard Keynes called “animal spirits” must be revived through stimulus measures. Or they can treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades and thus put themselves in a better position to take advantage of coming opportunities.”

Not to sound crotchety or anything but they could also stop being really stupid and do both.

That Greece, for instance, really needs to fix everything that’s been papered over in the last few decades doesn’t mean they don’t also need stimulus.

Basically what Rajan is saying is “they could give the victim in the burning building CPR or they could take him out of the building, which would put him in a better position.”

Same, incidentally, in America. We really do need economic stimulus. And, for instance, Mitt Romney’s Republicans are proposing to deliver more than 5 trillion f-ing dollars of it, even if it’s to the demographic with the lowest multipliers humanity may ever know. So if one were a reflexive moron who imagined that “Keynes” means nothing less and nothing more than indiscriminate deficit spending then they’d presumably think Romney’s fiscal policy proposals are a little inefficient multiplyer-wise but otherwise it’s the bees knees.

Except, of course, pretty much every other non-Republican Keynensian, we also need to stop papering over the last three decades of really crap decision making and position ourselves to take advantage of upcoming opportunities.

Clue: Snitting around literally letting paved roads crumble to gravel before repaving them the way we’re doing it here in America is not what Keynes had in mind. Building another Rio–Antirrio bridge across the other end of the Gulf of Corinth in Greece while preserving full employment in the civil service is not what Keynes had in mind either.

As for Spain, which seems to be next up on everybody’s make-em-take-their-medicine radar? I dunno. Why not try it Rajan’s way? I mean, what the heck, their total unemployment is already 25% and their unemployment rate for Spaniards under age 30 is over 50%!!! Why not let overall unemployment among Spanish voters go to, say, 75-80% while fixing “all that has been papered over in the last few decades and thus put themselves in a better position to take advantage of coming opportunities?” What could possibly go wrong with that?

figleaf

TallDave May 3, 2012 at 10:33 am

Except that we’re already spending 40% of GDP and largely got here by stimulating the housing market, so more fiscal stimulus amounts to saying “The best way to get him out of the burning house is to light a fire under him.”

figleaf May 3, 2012 at 11:40 am

“The best way to get him out of the burning house is to light a fire under him.”

Wait a second, I thought that was Rajan’s plan.

Also, 40% of GDP? I didn’t know you lived in Spain. Here in the U.S. the annual deficit is ~10% of annual GDP. I know Romney and Ryan Republicans want to jack that even higher with debt-driven tax expenditures but I think 10% is pretty bad considering how much is structural and how f-ing little is efficiently targeted, temporary stimulus. Having that kind of structural debt, let alone gleefully promising to drive it even higher and leaving it there forever while intentionally continuing to push unemployment towards the low double digits, isn’t just bad it’s criminally (not to mention arithmetically) irresponsible.

But that still doesn’t mean that anti-Keynesian austerity (subtracting 10% or more jobs and spending from the current economy) is going to either revive the economy or even lower the #%!~#% debt.

I mean if, as Tyler says, we’re simply in a period of stagnation such that it’s not humanly possible to create positive-productivity employment of any kind then sure, deficit spending and stimulus really won’t do us any good — we should just let 10-20% of the population starve or die of disease and continue fiscal-syphoning till we’re back at a nice, healthy 1% aristocracy with peasantry for the remaining 79-89% (remember, we’re letting 10-20% die off) in hopes that in another 300-800 years we get another Renaissance and can give it another go.

Unlike certain parties on the right I don’t happen to believe we’re in anything like that situation.

Thus my original point that Rajan’s an idiot for saying we should do either/or when it’s perfectly possible to do both. And if Tyler is really thinks Rajan’s idiotic we-can-only-do-one position “nails it” then maybe he needs to slow down his reading pace from, say, 500 books and papers a day to 450 or so.

figleaf

TallDave May 3, 2012 at 12:20 pm

I said we’re spending 40% of GDP, not borrowing. With “debt-driven tax expenditures” you’ve veered into incoherence — taxes are seized, not spent.

40% of GDP is too much. Incentives matter.

The nonsense about “aristocracy” ignores the central aspect of aristocracy — coercion. The 1% didn’t seize their wealth, nor do they send in jackbooted thugs to oppress the 99%. Quite the opposite — they become rich by serving the 99%. The genius of capitalism is to take the human drive to dominate and force it through the narrow capillary of voluntary exchange.

The answer to our problems is assuredly not to replace the 1% who earned the wealth they control with a new 1% that seizes theirs.

TomVee May 3, 2012 at 1:41 pm

“The 1% didn’t seize their wealth, nor do they send in jackbooted thugs to oppress the 99%. Quite the opposite — they become rich by serving the 99%”

Because in conservative ideology land, no wealthy people ever inherit wealth, they always earn it. Right…

Except in real US life, 7 people inherited wealth equivalent to the net worth of 30% of the population. Easy to make false arguments if you ignore reality, but the 1% definitely did not “earn” their wealth, unless you consider winning the sperm lottery “earning”.
http://www.washingtonpost.com/blogs/blogpost/post/wal-mart-heirs-have-same-net-worth-as-the-bottom-30-percent-of-americans/2011/12/09/gIQAkg6FiO_blog.html

TallDave May 3, 2012 at 3:44 pm

The proportion of inherited wealth is small,.for several reasons — until very recently we had total estate tax rates exceeding 70% in some cases, the amount of wealth that exists today is much larger than in past generation (and was therefore created), most wealth is given away, and relatively few rich descendants are able to duplicate their forbears’ success.

In any case, it’s not clear why inheritance would be bad per se.

The bottom 30% is content to save almost nothing. That may be a more rational course than working 80 hour weeks for decades so the gov’t can confiscate most of what you earn even as a large segment of society resents you.

TallDave May 3, 2012 at 3:48 pm

See here for instance:

1. According to a study of Federal Reserve data conducted by NYU professor Edward Wolff, for the nation’s richest 1%, inherited wealth accounted for only 9% of their net worth in 2001, down from 23% in 1989. (The 2001 number was the latest available.)

2. According to a study by Prince & Associates, less than 10% of today’s multi-millionaires cited “inheritance” as their source of wealth.

3. A study by Spectrem Group found that among today’s millionaires, inherited wealth accounted for just 2% of their total sources of wealth.

http://blogs.wsj.com/wealth/2008/01/14/the-decline-of-inherited-money/

Steve May 3, 2012 at 7:09 pm

The distinction between the 1% and everyone else kind of goes straight to the heart of the TGS argument. For some reason the median worker has stagnated yet the 1% has done even better than predicted. Apparently the 1% are innovating just fine but the median guy is lagging. As someone else pointed out – what if we look at the mean rather than the median?

iamme73 May 3, 2012 at 8:00 pm

taxes are seized, not spent.

I admit upfront. I am not an economist, but this type of thinking strikes me as odd. Are you saying you don’t think the federal government has the right to tax? I am always alarmed at rhetoric that seems to treat taxes as theft.

Americans agree to pay taxes. This is the truth.

Also, tax expenditures based on my understanding are government spending.

Take a landlord and a renter. The renter agrees that he/she owes the landlord rent. The renter agrees that a certain amount of earnings belong to the landlord.

Let’s say the landlord says to the renter, “If you do x, y, z, around my property, I will lower your rent $100 a month,” the renter agrees.

The landlord can decide as an incentive and to ensure that the renter keeps doing x, y, z, around the property for a full year to collect the full monthly rent and at the end of the year write a check for $1200, or the landlord can cut the monthly rent upfront by $100 dollars a month.

Either way whether that landlord writes a check or not, the landlord is spending.

This is the same dynamic as the federal government and tax expenditures. Tax payers agree that the government has a right to collect taxes, which means tax payers agree that we owe the federal government money.
This means we acknowledge that some part of our earnings is the government’s money, because saying you owe is the same as saying that a portion of your earnings is owned by someone else.

For the federal government, tax expenditures equals spending, because just like the landlord in my example, the federal government can either collect all taxes owed and write checks based on those tax expenditures at the end of the year or the government can cut taxable income upfront based on those tax expenditures.

Either way, the government is spending.

TallDave May 4, 2012 at 10:17 am

Steve — or better yet, look at living standards.

iamme73 — Sure, the government has the right to tax, just as it has the right to imprison you, or put you to death. The argument is all about when and in what proportion these things are ethical, not whether gov’t has a right to do them at all.

Ideally, the government would confine itself to providing legitimate public goods that could not otherwise exist — roads, defense, courts, regulation, etc.

“Collecting more taxes than is absolutely necessary is legalized theft.” -Calvin Coolidge

iamme73 May 4, 2012 at 10:36 am

Ideally, the government would confine itself to providing legitimate public goods that could not otherwise exist — roads, defense, courts, regulation, etc.

Well, despite much public complaining to the contrary, in poll after poll almost all federal spending is extremely popular with Americans. Social Security, Medicare, Medicaid, Military, wages supports like unemployment and food stamps, not to mention all the government spending on subisidizing employer provided health insurance, 401k’s, housing, children, paying for college, etc.

The problem is not that the government is doing things the vast majority of Americans don’t want. If only that was the debate, we’d identify the programs we don’t like and get rid of them.

Instead Americans think the budget can be significantly cut by getting rid of fraud and waste, gutting the EPA, foreign aid, and welfare.

This is the fundamental issue.

TallDave May 4, 2012 at 10:43 am

Re tax cuts — taxes are seized. In your example, the landlord should be holding a gun, which puts a little different flavor on things.

Tax cuts are not spending for the same reason an armed robber stealing $5K but then giving you $100 back is not the same as your friend giving you $100.

TallDave May 4, 2012 at 11:55 am

in poll after poll almost all federal spending is extremely popular with Americans.

Yep, that’s the problem with democracy, as de Tocqueville noted. It’s partly why we were set up as a republic.

We’d probably be a lot better off if spending was constitutionally more difficult than it is.

iamme73 May 9, 2012 at 10:57 am

TallDave:No, there really is a literal gun.

No, there is not. Voters can elect politicians who will change the tax laws. The is objective reality. Voters don’t elected such politicians because most voters agree to pay taxes.

TallDave: Try disagreeing with the gov’t on whether you should pay taxes,

Yes, that is because the public give’s it’s tacit consent to be taxed. The constitution gives the government the legal right to tax. So yes not paying your taxes is breaking the law and it is outside the mainstream of the behavior of most Americans who think you should pay your taxes.

TallDave: and see if they don’t send men with guns over to your house to take it by force.

More nonsense fantasy stuff. Here is reality

On April 15, millions of Americans will stand in long lines at the post office to file their tax returns. Although usually a law-abiding citizen, the Explainer can’t help but wonder: What happens if you get tired of waiting and decide not to file your taxes at all?
Probably nothing. If you’re self-employed without any major assets or loans, the odds of getting busted are extremely low. In fact, an estimated 7 million Americans fail to file their taxes every year, and in 2008 the IRS examined only 158,000 such cases. That comes out to a roughly 2 percent chance of getting caught. Even if the IRS does audit you, the agency probably won’t press charges. Instead, they’ll just file a tax return for you and charge you a fee for the trouble.

TallDave:There is no “agreement,” taxes are coerced or taken by force where coercion is insufficient.

Yes, there is an agreement. First the US constitution gives the government the right to tax. So as a citizen of this nation you either agree with the constitution the law or you can try to change by voting or by changing the law.

Again, the overwhelming majority of Americans agree to pay taxes. This is objective reality.

TallDave:A public good is is a good that is non-rivalrous and non-excludable.

Based on your definition. A public good to others is much different.

TallDave:Taxes are not at the lowest rates in decades, in fact they are still near historic highs.

Haha that was a joke correct. First those charts don’t show what you seem to believe they show. Basically government revenues have been flat and have federal revenues have declined since 2000.

The larger problem is that you are comparing apples to oranges.

You take a nation with a growing population and a growing economy and yes revenue for all government will be higher that has little to do with the rate of taxation. The rate of taxation is at it’s lowest point in decades. Will you please deal with reality and stop these little side things that don’t address anything.

iamm73@aol.com May 7, 2012 at 4:07 am

Re tax cuts — taxes are seized. In your example, the landlord should be holding a gun, which puts a little different flavor on thing

I spefically chose rent, because everyone has to have somewhere to live, that means that nearly everyone is paying some form of rent/mortgage. People agree that they owe the landlord or the bank. People agree that they owe taxes.

Tax cuts are not spending for the same reason an armed robber stealing $5K but then giving you $100 back is not the same as your friend giving you $100.

I thought you agreed that the government has a right to tax.

Either you agree the federal government can tax, or you are on the fringe of people who don’t think the federal government can tax, and you think taxes are theft.

Acceptance of the governments right to tax means accpetance of owing the government. This means that tax cuts, deductions, and credits are government spending. Denial of this is just word games.

TallDave May 7, 2012 at 3:36 pm

Not everyone pays rent/mortgage, some people simply own their homes.

People make a contract with their bank/landlord, for what they decide the property is worth. The landlord does not come by with a gun and tell them what everyone else has decided they should pay.

Gov’t must commit certain acts of violence, but their right to do so is not unlimited. Taxes should be limited to what is necessary to provide legitimate public goods. As Coolidge said, taxation in excess of this is simply organized theft, just as excessive use of gov’t force is assault or murder.

Iamme73 May 7, 2012 at 9:15 pm

TallDave:Not everyone pays rent/mortgage, some people simply own their homes.
People make a contract with their bank/landlord, for what they decide the property is worth. The landlord does not come by with a gun and tell them what everyone else has decided they should pay

Clearly I typed nearly everyone pays rent, which defacto means some people don’t. So I don’t get why you’d point that out. Not everyone pays taxes either.

And most people who own their home outright paid someone a mortgage.

What is this “gun” business? We live in a society in which the overwhelming majority of Americans agree to pay taxes. The government didn’t put a gun to anyone’s head. The American people elected politicians who collected taxes. The American public basically agrees to pay those taxes. There is no “gun”. Again you are into word games that don’t make sense.

TallDave:Taxes should be limited to what is necessary to provide legitimate public goods

I know you think this is a profound statement about taxes, but it is basically meaningless without context. Who decides what is neccessary? What is a public good?

The reality is our government spends most of its money on defense/military, social security, medicare, medicaid, and because of this horrible recession wages supports like unemployment and food stamps. A lot of Americans consider those things public goods that are necessary. Infact most Americans consider government spending on education to be a necessary public good.

And based on what the vast majority of the American public wants the government to do we are not over taxed. Taxes are at their lowest rates in decades.

TallDave May 8, 2012 at 2:08 pm

No, there really is a literal gun. Try disagreeing with the gov’t on whether you should pay taxes, and see if they don’t send men with guns over to your house to take it by force. There is no “agreement,” taxes are coerced or taken by force where coercion is insufficient.

A public good is is a good that is non-rivalrous and non-excludable.

Taxes are not at the lowest rates in decades, in fact they are still near historic highs.

http://www.usgovernmentrevenue.com/revenue_history

TallDave May 8, 2012 at 2:11 pm

BTW, it’s not nearly everyone, either. About 2 in 5 people own their homes outright.

http://ask.yahoo.com/20060314.html

Anti-Gnostic May 3, 2012 at 11:26 am

Same, incidentally, in America. We really do need economic stimulus.

Sure we do, but how do we pay for it? I’d like to believe all those wise old Keynesians carefully saved the seed corn during the boom and can now judiciously distribute it during the bust too, but that doesn’t seem to have happened. Rolling over debt into artificially suppressed rates is no different than the shlemiel rolling over credit cards, and just creates more malinvestments that will be liquidated in their turn.

Some countries–perhaps many–will just have to write off large amounts of debt at this point.

figleaf May 3, 2012 at 11:56 am

“I’d like to believe all those wise old Keynesians carefully saved the seed corn during the boom…”

I believe all the “wise old Keynesians” were actually in the minority during those boom times. And quite a few of them were arguing, as actual Keynsians are prone to do, that running 10% deficits during a boom is a very, very bad idea because, well, actually, booms are when government needs to pay down debt and run surpluses so the decks are cleared for stimulus during the next bust.

That the most recent boom was driven by what amounted to further, private-sector Keynesian money-printing in the form of “exotic” finance-industry-instrument froth is even more reason not to commit further deficit spending.

I mean, c’mon. Keynes said there’s only one circumstance where deficit spending is a good idea. We happen to be in that circumstance. Debt taken on when we decidedly weren’t in that position (cough/2001-2007/cough) made that much harder to do deficit spending the only time it’s a good idea. Which, again, would be now.

I mean, yeah, A-G, it’s a tough call how we could pay for more stimulus. But please don’t pretend it’s Keynesians that got us to this point in the first place.

figleaf
figleaf

Anti-Gnostic May 3, 2012 at 12:09 pm

And quite a few of them were arguing, as actual Keynsians are prone to do, that running 10% deficits during a boom is a very, very bad idea because, well, actually, booms are when government needs to pay down debt and run surpluses so the decks are cleared for stimulus during the next bust.

I have zero argument with this in theory. In practice, ain’t gonna happen in a social democracy. So with as much debt as is out there I don’t see a lot of options. When debtors get to a certain point, they just need to declare bankruptcy.

That the most recent boom was driven by what amounted to further, private-sector Keynesian money-printing in the form of “exotic” finance-industry-instrument froth is even more reason not to commit further deficit spending.

That’s why these exotic instruments should have been allowed to liquidate, along with all the other puffed-up sectors.

Also, has Krugman or any other prominent Keynesian EVER argued that the government should be paying down debt and running surpluses and saving for a rainy day? Maybe somebody has and I’ll get my pleasant surprise for the day.

TomVee May 3, 2012 at 1:44 pm

Have you never heard of Clinton and his budget surplus?? (must have vanished down the conservative party-line memory hole)
GWB argued that Clinton’s surplus justified his tax cuts, while now the R’s argue that bad economic times justify tax cuts. Pretty clear there is no circumstance or deficit that will not justify tax cuts to R’s.

Anti-Gnostic May 3, 2012 at 3:24 pm

I recall the “Clinton surplus,” but I think the fiscal picture was a little more complicated than you make it. But my question was, has Krugman or any other prominent Keynesian ever actually called for these ‘classic’ Keynesian policies?

(And partisan politics are a complete waste of time with me, as I don’t vote and am a completely over-the-cliff reactionary. Republicans recoil in horror and Democrats faint outright at my awful, awful views. I disagree vehemently with the Republicans on tax cuts–I don’t believe there should be an income tax.)

The Original D May 3, 2012 at 3:36 pm

A lot of smart folks opposed the Bush tax cuts the first time around: http://en.wikipedia.org/wiki/Economists%27_statement_opposing_the_Bush_tax_cuts

TallDave May 3, 2012 at 3:57 pm

Many signed up to oppose a tax cut or defense spending, but it’s harder to find them arguing for non-defense spending cuts. And while tax revenue as a % of GDP has not actually changed much in 60 years, spending has gone off the charts — the 2009 deficit could not have been closed even with a 100% marginal tax rate on income over $100K, and we’re spending a % of GDP last seen during the massive war effort of WW II.

Scratch a Keynesian and generally you find there’s a Democrat/statist underneath.

mpowell May 3, 2012 at 3:59 pm

Check out a chart of US national debt/GDP in the post WWII era sometime. Anyone who looks at that chart and decides the democratic party + keynesian economics can’t work is an idiot. The problem is Reagan Republicans. Sane policy starts (but doesn’t end) with having Democrats in national office. Also, I remember Krugman spending a lot of time railing against Bush’s tax cuts for precisely this reason. The fact that you aren’t aware of this does not do you much credit.

TallDave May 3, 2012 at 4:09 pm

BTW, overall (fed+state+local) taxation is still near historic highs.

http://www.usgovernmentrevenue.com/revenue_history

It’s funny people still give Clinton credit for the “surplus” (which wasn’t; we still ran a deficit with SS excluded) even though he actually shut down the government in his ardor to increase spending more than the GOP was willing to allow.

Anti-Gnostic May 3, 2012 at 5:06 pm

“Also, I remember Krugman spending a lot of time railing against Bush’s tax cuts for precisely this reason.”

That’s not very precise. I read the statement linked above. It looks like the answer to my question is still no.

Derek C May 3, 2012 at 6:53 pm

So, if you want to read Krugman supporting budget surpluses in good times, just go to http://web.mit.edu/krugman/www/warfore.html.

And, reading his comments, it’s simply astounding how accurately – in 2002! – he predicted the future:

“Now along comes Bush with two major proposals: a huge tax cut, which not incidentally greatly reduces the progressiveness of the tax system; and a partial privatization of Social Security that makes sense only if substantial funds are transferred over from general revenue to make up for lost contributions. These proposals are made to seem less irresponsible than they are in several ways: by relying on CBO budget forecasts that make utterly unreasonable assumptions about future spending; by not mentioning the budget implications of the Social Security proposal; and by engaging in petty dishonesty, like the fact that the cost of the Bush tax proposal is always given on a nine – let me repeat that: nine – year basis, without taking account of interest costs, and then compared with budget forecasts that are on a ten year basis. A realistic estimate may be that over the next 10 years Mr. Bush’s tax cut would subtract around $1.9 billion from the budget, and that his Social Security proposal might require another $500 billion of support from general revenue. Given a realistic surplus projection, which will be in the hundreds of billions rather than the trillions – well, you get the point.

If it’s a Bush administration and a Republican Congress, this will all go into effect – and then, after a couple of years, the budget truth will become apparent. The natural thing then would be to roll back the tax cut; but who are we kidding? Instead there will be years of wrangling.

A cynical interpretation of all this is that conservatives are taking advantage of a moment of irrational fiscal exuberance, when nobody is worrying about where the money will come from, to do away with as much as possible of the progressive tax system. Then when reality bites, this will be taken as a fait accompli, and anyone who tries to undo it will be accused, as Bush recently put it, of fomenting “class warfare”.

But if this is warfare, who started it?”

The Original D May 3, 2012 at 7:11 pm

“And while tax revenue as a % of GDP has not actually changed much in 60 years”

This is just wrong. Revenue as a % of GDP is the lowest it’s been in 50 years.. Yes, spending is high too. So why not try to fix both? One does not have to oppose spending cuts to support higher taxes or vice versa.

TallDave May 4, 2012 at 10:21 am

This is just wrong. Revenue as a % of GDP is the lowest it’s been in 50 years..

Wrong, overall taxation is near historic highs.

http://www.usgovernmentrevenue.com/revenue_history

And while federal revenue was near historic lows in 2009 (but has since recovered), federal revenue has generally always been between 15-21 percent, and the trough was fairly typical for a deep recession.

Derek C May 3, 2012 at 6:36 pm

Paul Krugman in 2003:
“Here’s why Bush’s plans have me upset: our current situation is one in which, mainly through good luck – an unexpected economic boom, together with a political deadlock that has prevented both ambitious new spending plans and irresponsible tax cuts – we have managed to achieve an almost responsible fiscal policy. That is, our current situation – no wars or major military rivals, demography that is more favorable than it will be for the next couple of generations – is the sort of situation that, on any model, ought to be used to run surpluses and pay down debt. There’s a good case that we aren’t running surpluses as big as we ought, but at least we’ve moved in the right direction.”
So, yes, Krugman (and every Keynesian or new Keynesian) argues that debt should be paid down in boom times.

TallDave May 4, 2012 at 10:44 am

No, he just opposes Republican tax cuts. Not the same thing.

TallDave May 4, 2012 at 10:52 am

And, of course, Republican spending.

Find me the Krugman piece where he says “hey, this proposed Democrat nondefense spending is a bad idea, we should pay down debt instead.”

Krugman is not so much a Keynesian as a statist who cherrypicks Keynesian justifications to argue for statism

k May 3, 2012 at 9:55 am

“During the postwar era of heavy regulation and limited competition, established firms in the United States had grown fat and happy,
enjoying massive quasi-monopolistic profits.”

For US railroads, I believe this is not the case. Railroads were suffering from massive losses during the days of heavy regulation.

Donald A. Coffin May 3, 2012 at 10:10 am

Why is this an either/or choice? Why should we countenance either a rotting economy today or a stagnant economy in the future? In particular, why should we conclude that policies designed to counteract the continuing high unemployment and slow growth must lead to slower long-term economic progress? Or that policies designed to boost long-term economic growth are only possible if we accept higher unemployment and lower incomes today? This is a false dichotomy and should be seen as such.

Tom May 3, 2012 at 4:30 pm
TallDave May 4, 2012 at 10:35 am

That was the theory of Solyndra, BeaconPower, etc. Unfortunately, there is no free lunch — you can misallocate today and pay for it tomorrow, or let markets work today and enjoy a better tomorrow.

TallDave May 4, 2012 at 11:56 am

Also, lol @ high-speed rail.

TommyVee May 5, 2012 at 1:48 pm

lol @ stupid americans who don’t understand that world oil supplies are finite, and are willing to bankrupt themselves by trying to perpetuate a financially and environmentally unsustainable oil-dependent transportation, while ridiculing any alternative to sitting in SUVs in traffic jams and running a trade deficit to import ever more expensive oil.
Once the US has bankrupted itself with oil addiction, the rest of the world will have built non-oil dependent transportation infrastructure but the US will lack the resources to build the necessary infrastructure. Who will lol then?

Jude May 3, 2012 at 10:32 am

He seems rather muddled over the difference between manual and unskilled labour. There are plenty of manual jobs in construction but not many unskilled ones.

Patrick May 3, 2012 at 11:28 am

The labor problem is more problem is much bigger than “skills”. If your core skill is learning, you do well in this acceleration of creative destruction in the knowledge economy. If your skill something else, technology quickly puts those skills in the trash heap. Education lags technology so it’s hard to see much improvement by training.

Dredd May 3, 2012 at 11:23 am

As the WSJ has said, the same principles do not apply to a Plutonomy that apply to a democratic economy:

“… the U.S. is becoming a Plutonomy – an economy dependent on the spending and investing of the wealthy. And Plutonomies are far less stable than economies built on more evenly distributed income and mass consumption.”

Ranjit Suresh May 3, 2012 at 11:39 am

Assume for a moment that there has been, at least until recently, TGS. Note that it kicks in not very long after the expansion of university education and the formation of a cognitive elite. Harvard’s student body was merely of above average intelligence in 1950 but by 1960 was comprised of an extraordinarily narrow sample of the most intelligent.

It seems as if, oddly enough, that the development of a cognitive ruling class has not been particularly beneficial to productivity growth and technology, at least at first glance. The alternative scenario is that things would have been much worse in a world where WASP entitlement still reigned. But I wonder about that.

Roy May 3, 2012 at 2:13 pm

This is my horrible suspicion. Credentialling has lead to the smartest people in our society conforming to academic and intellectual heirarchies in order to prosper, but it may be the case that what creates true innovation is a different career path. In addition many of the most creative minds go into liberal professions today, professions that they were often restricted from in the days of the old WASP hegemony, while in the past they often found the best path to advancement was industry and appliedsciences.

Mike May 3, 2012 at 11:49 am

I’m not sure why this article was worthy of reposting. There doesn’t seem to be a clear thesis, just a list of facts (some more truthy than others) and some hazy arguments about how stimulus is bad and better government is better. Maybe I’d like this better if it lined up better with my confirmation bias, but it’s pretty light on testable hypotheses, both in describing the last 20 years of policy and in terms of policy prescriptions.

gab May 3, 2012 at 12:35 pm

My favorite line “…and the broader use of technologies such as electricity and the internal consumption
engine.”

A Freudian slip if ever there was one.

And another thing – did anybody proofread this thing?

CC May 3, 2012 at 1:19 pm

i don’t get that paragraph at all. why can’t we restore AD and enact structurally beneficial reforms? isn’t that the obvious answer?

Anti-Gnostic May 3, 2012 at 1:24 pm

How much more money are we supposed to print? What’s left to “reform” given that the Fed is buyer and lender of first and last resort?

TomVee May 3, 2012 at 2:21 pm

One obvious reform that always gets ignored is to return tax rates on high income taxpayers to levels that can fund government without running deficits.
Short-term stimulus can be combined with true tax reform, that balances revenues and expenditures (because “reform” and “cutting services for the poor” are not synonyms, despite the current conservative usage).

Anti-Gnostic May 3, 2012 at 3:31 pm

One obvious reform that always gets ignored is to return tax rates on high income taxpayers to levels that can fund government without running deficits.”

LOL. We could confiscate 100% of all their property and clean out their bank accounts–the ones we could catch before they fled overseas. Wouldn’t make a dent.

Also, are you thinking fondly back to those 70 – 90% rates back before TFRA? Here’s a clue: nobody paid them. They set up tax shelters, deferred compensation, played games with expense accounts and company vehicles, opened offshore accounts, took the rest of the year off, etc.

The Original D May 3, 2012 at 3:42 pm

It’s not either/or. Relative to GDP, revenue is at a historic low and spending is at a historic high. Both need to be brought into line.

TallDave May 3, 2012 at 4:01 pm

Revenue is fairly typical for a recession (the “historic low” is by a tenth of a percent or so). Spending is wildly out of proportion.

will May 3, 2012 at 6:48 pm

Is this true? I recall reading that all of the 1%’s wealth would cover ~1/4 of the deficit.

CC May 3, 2012 at 6:23 pm

as much as it takes

Ranjit Suresh May 3, 2012 at 2:36 pm

Yes, these are my best guesses as well. I would add that the siphoning of cognitive elites into academia and increased credentialism means that even when they do enter into productive fields many of their prime years have been already spent.

There’s a price to be paid for credential inflation beyond wasteful signalling – squandering the most creative and productive years of our most smartest young people. This is why I get annoyed with elites of both liberal and conservative persuasions when they argue more education is the answer for all our ills. Not if it means people can’t begin advanced careers until they’re near 30.

JVM May 3, 2012 at 5:17 pm

It’s so much easier to make these arguments against Keynes than Friedman; this guy is good at pitching his battles.

Orange14 May 3, 2012 at 6:06 pm

If all the economists including the ones who host this blog were fired tomorrow and forced to seek some type of alternative work, would they be successful in their job search? Furthermore, would anybody care? This current problem can be boiled down to one simple sentence, “…there is a lack of demand…” anything else must be commentary on how to solve this problem or not published. I’m sorry but this paper is really lacking in any critical thinking.

Bill May 3, 2012 at 6:13 pm

Raghu makes a serious error which signals this is more polemic than substance.

Ask your self a question: Are All the industrialized countries who have problems suffering from the same cause of there problems. That’s what he says in his article.

Is this true?

Spain, Iceland and Ireland fprivate financial systems sank the public system, which serves as a backstop to the private financial system. The US and Britain similarly faced a private financial
System crisis, which, because the governments guaranteed private banks, became a public fiscal issue.

Ask yourself: without the private financial crisis would there have been fiscal crises in the countries mentioned above.

The, ask yourself: how did the author describe the problem, and you will see the polemics of his argument

Anti-Gnostic May 4, 2012 at 12:30 am

which serves as a backstop to the private financial system.

It’s called moral hazard. Google Fannie and Freddie.

Bill May 4, 2012 at 4:40 am

Anti, you missed the point, or didn’t want to acknowledge it. Raghus argument is that industrial policies of the last 20 years were the cause.

mg May 3, 2012 at 6:57 pm

About the best I can say for this blog is that Cowen has the commenters he richly deserves. He ought to write more about which expensive restaurants people should eat in, and less about the virtues of people accepting their diminished lives. Or maybe vice-versa. Either way, he’d look less like a sheltered, fat, middle aged guy who’s never suffered from want a day in his life.

EM DC ECONOMIST May 3, 2012 at 8:56 pm

In two lines you have proved that TC is far nicer than you will ever be. Well done !

Steve May 3, 2012 at 9:26 pm

Agree. Just recently started reading this blog and do not agree with some of TC’s ideas. But he’s polite and does not seem mean-spirited when he disagrees with people.

mg May 4, 2012 at 2:28 am

So it isn’t about being right, or advocating things that will make peoples’ lives better — it’s about being “nice.” I’m going to take a wild stab here and say you, like Cowen, are another fat, middle aged guy who’s never suffered from want a day in his life. Such people prize things like “niceness” because, like the expensive meals Cowen enjoys, they can afford to prize them.

I’m never going to meet Cowen. I don’t give a hang about how “nice” he is, it doesn’t affect me in the slightest. But his aggressive desire to see people shut up and meekly accept the destruction of their futures does affect me, and millions of others. That’s important. If you had a normal functioning value system it would be important to you, too.

EM DC ECONOMIST May 4, 2012 at 8:19 am

I’m in my mid 30s, non-white, with a flat stomach (work out regularly) and I have had scholarships/stipends fund my education after high school through my doctorate. If you are open to reading and thinking you will realize that the world is a complicated place. It isn’t clear which policies hurt or help different sets of people. I don’t have to agree with everything TC writes – and I disagree frequently – to believe that he wants the same fair, just world that I do. And when his words are inconsistent with my world view, I see no reason to impugn his value system.
Have a good day comrade.

mg May 4, 2012 at 2:36 pm

People who want a “fair, just world” don’t crow about being a “stagnationist.” People with a value system worthy of respect don’t, either. Ultimately, whether you agree or disagree with Cowen isn’t the point — the point is you somehow think Cowen shouldn’t be attacked for his cavalier attitude towards other peoples’ suffering because he phrases it in a nice way. Physically or not, you’re just as warped and fat as he is. Thanks for the well wishes.

Martin May 4, 2012 at 9:32 am

Tyler Cowen has been wrong about everything since this crisis began, why do people still listen to him? Just check his past entries and compare them to what has been going on.

johnbk May 4, 2012 at 12:40 pm

“Tyler Cowen has been wrong about everything since this crisis began,”

Broadly true I’m afraid. Sometimes excruciatingly so.

idiot May 4, 2012 at 5:57 pm

Martin has been wrong about EVERYTHING since he started commenting on this blog, why do people still listen to him? Just check his past entries and compare them to what’s going on.

…Wait. Provide actual EVIDENCE for people who don’t actually read this blog all that often? Nah, you can trust me.

Gerard May 4, 2012 at 1:39 pm

Modeled Behavior has a nice take on this.

Thomas H May 4, 2012 at 4:49 pm

“They can act as if all is well except that their consumers [and invester] are in a funk and so what John Maynard Keynes called “animal spirits” must be revived through stimulus measures. Or they can treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades and thus put themselves in a better position to take advantage of coming opportunities.”

Why do Mr Rajan (and Tyler) think these are alternatives? Idle resources can be employed investing in income-producing assets.

TallDave May 4, 2012 at 5:57 pm

Exactly, like clean energy, or high-speed rail. As a great man once said, “The true engines of economic growth will always be companies like Solyndra.”

Lorenzo from Oz May 5, 2012 at 10:04 pm

If Rajan is so keen on supply-side reforms, why does he not mention the developed country which has done lots of supply-side reforms and sailed through the GFC and Great Recession with barely a ripple? Because it does not suit the story he wants to tell.

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