The new “free lunch” economics

by on August 19, 2016 at 3:58 am in Economics, History | Permalink

From Scott Sumner:

…what’s happened since 2009 involves not just one, but at least five new types of voodoo:

1. The claim that artificial attempts to force wages higher will boost employment, by boosting AD.

2. The claim that extended unemployment benefits—paying people not to work—will lead to more employment, by boosting AD.

3. The claim that more government spending can actually reduce the budget deficit, by boosting AD and growth. Note that in the simple Keynesian model, even with no crowding out, monetary offset, etc., this is impossible.

4. More aggregate demand will lead to higher productivity. In the old Keynesian model, more AD boosted growth by increasing employment, not productivity.

5. Fiscal stimulus can boost AD when not at the zero bound, because . . . ?

In all five cases there is almost no theoretical or empirical support for the new voodoo claims, and lots of evidence against. There were 5 attempts to push wages higher in the 1930s, and all 5 failed to spur recovery. Job creation sped up when the extended UI benefits ended at the beginning of 2014, contrary to the prediction of Keynesians. The austerity of 2013 failed to slow growth, contrary to the predictions of Keynesians. Britain had perhaps the biggest budget deficits of any major economy during the Great Recession, job growth has been robust, and yet productivity is now actually lower than in the 4th quarter of 2007.

There is more at the link. And here is Scott from the comments:

As I recall, productivity did well during the 1930s. Why? If falling AD hurts productivity, then shouldn’t productivity have done very poorly during the 1930s?

See also my earlier post “Not all complaints can be true at the same time.

My current pet peeve is advocacy of fiscal stimulus without even bothering to consider whether the economy might be at or very close to full employment, much less considering whether the stimulus will target unemployed resources.

We do in fact need a good aggregate demand-based macroeconomics; the topic is far too important to allow it to become so politicized.

1 Leigh Caldwell August 19, 2016 at 4:06 am

If “Britain had perhaps the biggest budget deficits” why does Scott call this “austerity”? (Just because the British government did, I assume; but they’re politicians.) In reality, this was a classical Keynesian stimulus and if “job growth has been robust” this is surely precisely the (old) Keynesian prediction.

2 ChrisA August 19, 2016 at 6:13 am

Not just the British government, many economists and the opposition in the UK also called it austerity and worse, and predicted disaster. Of course this was all done for political purposes and to support rent seeking. Actually it is pretty clear that fiscal retrenchment can occur without detrimental effects to the overall economy if the Central Banks are willing to let it. The tragedy of Europe is that both the ECB and national economies engaged (and continue to engage) in austerity at the same time, driven by inflation phobes. Hence most bond yields are now negative, indicating deflation for a generation. Yet despite this the internet Austrians still claim that CBs are overstimulating and somehow the world is experiencing a monetary bubble. Another version of voodoo economics.

3 anon August 19, 2016 at 9:20 am

It was a called austerity because it was a reduction from plan and trend. Now think about this, it was done because everyone worried that debt was unsustainable. And now everyone worries about negative interest rates. Too successful? Or simply misplaced concern?

On people wanting strict Keynesian fiscal stimulus .. now? Whom?

4 TMC August 19, 2016 at 9:25 am

Sounds like my wife’s shoe shopping. You wouldn’t believe how much she saved me last weekend.

5 anon August 19, 2016 at 9:28 am

If she reduced from budgeted expenditure, that is real savings.

6 anon August 19, 2016 at 9:30 am

Of course, we stumble on a good metaphor. Even if budgets pass, many husbands/citizens do not agree, and think that spending to budget is an affront.

7 MOFO August 19, 2016 at 9:43 am

Quibbling about term here, but reducing from budgeted expenditures may be real savings, but if you are spending more than you are taking in, its still profligate spending,

If i budget for a 60″ flat panel on credit and only get a 55″ flat panel on credit, thats not austerity, no matter what what was budgeted for.

8 anon August 19, 2016 at 10:07 am

For years the Right thought that they could cut tax (income to the US government) and that Congress (like households in a bind) would have to cut spending. Congress never really agreed. Thus the persistent deficits.

If tax were simply indexed to spending we wouldn’t have this problem. Congress and voters could have a real conversation about the services they want.

9 anon August 19, 2016 at 10:12 am

Or we can continue a dysfunctional relationship, income and spending set separately.

10 Bob from Ohio August 19, 2016 at 10:17 am

“If she reduced from budgeted expenditure, that is real savings.”

Congress should just increase the budget from 3.5 trillion to 4 but only appropriate 3.5. Then we would not have a 500 billion deficit.

Right? Because we saved 500 billion.

11 anon August 19, 2016 at 10:22 am

I bet Bob, that if Congress did increase the budget by $500B, at that point you WOULD call it an increase. And a reduction again would be a rollback.

12 anon August 19, 2016 at 10:24 am

No one wants to address the true source of the deficit, that tax and spending are allowed to be separate issues.

13 MOFO August 19, 2016 at 10:31 am

@anon, So deficit spending is actually austerity because Republicans are bad and its all their fault?

14 anon August 19, 2016 at 10:40 am

I am actually standing back and looking at the system. Republicans control Congress though. Would you disagree that they have passed deficit spending bills?

15 anon August 19, 2016 at 10:42 am

And yeah, in retrospect the “temporary” “stimulus” tax cuts based in the Bush years were a continuing source of deficit, because spending was never brought in line with the new income reality.

16 MOFO August 19, 2016 at 10:44 am

I dont care about D’s and R’s. In my opinion, most people would not call spending less borrowed money ‘austerity’. Your definition is idiosyncratic at best, misleading at worst.

17 anon August 19, 2016 at 10:47 am

You seem to be saying that your strongest argument is semantic.

18 Heorogar August 19, 2016 at 10:57 am

My wife sends me forth to squander money on food and clothing. I use the change (from cash transactions) to invest in the lottery. We both win.

What would we do without wives and central planners?

19 anon August 19, 2016 at 11:06 am

My girlfriend nabs me really nice hiking clothes at Marshals, twenty cents on the dollar … though now I really have too many Marmot fleeces. So maybe some optimal budget was exceeded.

20 MOFO August 19, 2016 at 11:06 am

Im saying that you like to make ridiculous statements and if anyone calls you on it, you just wave your hands and change the subject.

21 anon August 19, 2016 at 11:15 am

Dude, if you sign a car lease for $600 a month, and it is reduced to $400, did you save anything? Did the counterparty lose anything?

That’s what happened with austerity, there was a .. let’s see:

“The austerity measures to reduce spiralling national debt clawed back £44billion in the last Parliament, which critics say has come at the expense of vital public services.”

Your non-mathematical, semantic, argument is that since they didn’t spend that £44billion they didn’t save anything?

22 anon August 19, 2016 at 11:17 am

To be clear, your argument is emotional. You are saying that since in your opinion they never should have spent that £44billion, not spending it does you no favors.

23 MOFO August 19, 2016 at 11:28 am

No, im saying that spending more than you take in is not austerity no matter what budgeting tricks you pull. If that werent the case then anything could be called austerity so long as its lower than some budget. Like so many others when you say ‘austerity’ you really mean ‘the scary sounding thing that means whatever i need it to mean at the time”.

24 anon August 19, 2016 at 11:35 am

So you have a custom definition of austerity then.

25 MOFO August 19, 2016 at 11:44 am

Oh great, another Wikipedia scholar. Articles like that are written by people like you mostly for this purpose. All that article proves is that you are not alone in defining austerity to mean ‘the scary sounding thing that means whatever i need it to mean at the time”

26 anon August 19, 2016 at 11:45 am

Also, The Economist

But congrats on drawing out a point of semantics, rather than real budget, tax, or spending.

27 MOFO August 19, 2016 at 12:35 pm

The semantic point is an important one because you are following the script of the Keynesian lie:

If you have budgeted to spend %125 of what you take in and you end up spending %120 of what you take in:

If your economy suffers label what you did austerity and blame the downturn on that horrible austerity and the charlatans who proposed it.
If your economy thrives claim that the wonderful healing power of Keynesian deficit spending saved the day.

Heads i win, tails you lose.

28 MOFO August 19, 2016 at 9:40 am

That seems a misleading definition of austerity to me. Austerity means not deficit spending as much as some would like? Doesnt align well with the typical “savage cuts” rhetoric that usually accompanies talk of austerity.

29 angus August 19, 2016 at 9:51 am

Brad DeLong, Larry Summers, Paul Krugman…..

30 anon August 19, 2016 at 10:10 am

For Japan or something? I thought that for the US they had moved to an investment is good argument.

Investment overlaps with fiscal stimulus, but we invest all the time. Universities are an investment.

31 Bob from Ohio August 19, 2016 at 11:50 am

“I bet Bob, that if Congress did increase the budget by $500B, at that point you WOULD call it an increase. And a reduction again would be a rollback.”

Unlike some here, I am not an idiot.

The budget is a guideline, a plan, a guess on what will be spent. Done in advance of spending.

Its the appropriation bills that determine spending.

So, no. A budget with an increase is only an increase if the actual spending matches the budget.

32 anon August 19, 2016 at 11:52 am

See the Economist link above, Bob.

What economists generally mean by austerity is a reduction in the “structural deficit” of the government, that is, ignoring the effects of the economic cycle.

33 Bob from Ohio August 19, 2016 at 11:57 am

So economists are stupid. Are we all supposed to be stupid?

34 anon August 19, 2016 at 12:00 pm

Who is stupid, the people like the CBO who try to project deficits into the future, using budgets, or people who don’t wanna know?

35 Bob from Ohio August 19, 2016 at 12:03 pm

“try to project deficits into the future” does not have anything to do with “austerity”

36 jon livesey August 19, 2016 at 2:45 pm

Not to be pedantic, but really because the Government worried that the *market* thought the debt was unsustainable. In fact the debt has been as high as about 250% of GDP in the past, and the UK successfully grew/inflated their way out of that. But bond dealers are not necessarily Keynesian economists, so the so-called “austerity” was really there to convince the market that the Government had things under control.

Oh, and I want stimulus today, just to compensate for the disastrous economic implosion post-Brexit. Oh, there wasn’t one? OK, never mind.

37 Govco August 19, 2016 at 2:49 pm

“For years the Right thought that they could cut tax (income to the US government) and that Congress (like households in a bind) would have to cut spending. Congress never really agreed. Thus the persistent deficits.”

Bush’s first budgetary year had a 157b deficit and initiated huge tax cuts, but the deficit in 2007 had grown by only 3b (a small fraction of what HHS loses track of each year). Of course, Bush and Democrat Congress (including Senator O) lost their way 08. The tax cuts expired in 2012 but 500b deficits are the new normal.

So tax decrease didn’t increase deficits and tax increases didn’t decrease deficits.

38 Brian Donohue August 19, 2016 at 11:01 am


39 Bob from Ohio August 19, 2016 at 11:55 am

“if you sign a car lease for $600 a month, and it is reduced to $400, did you save anything? ”

An actual obligation that is [by magic?] reduced is not the same thing as a budget that you change before the money is spent.

A budget, once again, is a plan on what you will spend.

If you are in a war and and you budget to spend X dollars next year and the war ends so you don’t spend X, has there been a sudden “austerity” imposed on the Defense Department?

40 anon August 19, 2016 at 11:57 am

“What economists generally mean by austerity is a reduction in the “structural deficit” of the government, that is, ignoring the effects of the economic cycle.“

What defines the forward structural deficit but budget? Are you making a “no one knows!” argument?

41 Bob from Ohio August 19, 2016 at 12:01 pm

No, I am making a “the definition is stupid” argument.

Austerity is a reduction in spending over actual spending in the prior year. Not a paper reduction in spending that has not occurred.

42 Govco August 19, 2016 at 3:07 pm

I’ll take the no one knows argument.

What are budget projections based on? Federal budgeting is exempt from all professional standards of accounting (e.g., GAAP). No commercial buyer or lender, no exchange, no private equity buyer would accept its financial statements. GAO has declared major components of the Fed govt “no go” zones impervious to audit. Massive Congressional bills contain fantasy revenue or savings (e.g. future Congress will cut medicaire reimbursements by 40%, future commissions will create billions in savings). The CBO’s methodology (10-years under current law) is routinely gamed by fake expirations, fake future cuts, fake dynamic scoring, unenforceable commitments on future Congresses, etc.

So the Federal budgets’ base and trend has no meaning to me until they conform to standard financial accounting that government likes to impose on private actors.

43 Ray Lopez August 19, 2016 at 5:01 am

Interesting that Sumner, despite this good criticism of fiscal policy, believes in monetary policy as a sort of cure all, despite evidence to the contrary (the Ben S. Bernanke et al 2002 paper “FAVAR” that shows for a variety of variables from 1959-2001, including GDP, Fed policy shocks accounted for merely 3.2% to 13.2% change, out of 100%). Pot. Kettle. Black.

Economists should concede that the economy moves in a non-linear fashion that cannot be remotely predicted or steered by any macro theory, but that would be bad for their business. Better to pretend to be the wizard behind the curtain.

44 UncleMartyPants August 19, 2016 at 7:01 am

Ray an Austrian?

45 Hampton August 19, 2016 at 8:17 am

no way, he just seems to be expressing cynicism about economists generally.

When he says “Economists should concede…”, it sounds like Economics operates on human consensus rather than some objective basis.

Of course the Austrians are correct — aggregate demand-based macroeconomics is irrational.

46 Ray Lopez August 19, 2016 at 8:43 am

@Hamilton – “When he says “Economists should concede…”, it sounds like Economics operates on human consensus rather than some objective basis” – that’s exactly how economics operates. Have you not read the works of Eleanor Olson (“Nobel Prize-winning economist Elinor Ostrom proved that people can—and do—work together to manage commonly held resources without degrading them”)? They don’t call it “political economy” for nothing. There’s nothing objective about economics; only Marxist economists talk like that. In fact, the entire basis of Western civilization is based on altruism. The Solow growth model says new technology is the only long term drive of growth, and guess what–most Nobel Prize winning scientists don’t care about money, nor capturing the value of their invention (many don’t even have any patents), but rather largely invent and create out of the love of their work, not ‘economics’. Business people exploit this for profit, but not the inventors. The people that go into finance and economics are the money-hungry ‘incentivized’ ones.

47 mavery August 19, 2016 at 8:32 am

At what point do we just lump all of macro into the “voodoo” bucket?

Well, not all of it. There are clearly points at which governments have to stop spending money they don’t have, points at which taxation becomes onerous, etc. But it seems to me that the best the profession can do is identify broad ranges and perhaps some covariates, since a large number of countries have both success and failure using a range of different macroeconomic techniques.

Would we be better off by just saying, “Ensure budget deficits don’t exceed the strength of your country’s institutions and keep inflation under control” and leaving it at that?

48 Art Deco August 19, 2016 at 2:30 pm

As far as I can see, much of what discussion of macroeconomics concerns itself would be consequential re the rhythm and tempo of economic growth within a particular business cycle (and, very often, just small variations in that rhythm and tempo).

49 rayward August 19, 2016 at 5:31 am

Yesterday I suggested that John Cochrane, like his more famous father in law, promotes Bizarro World economics, a world in which what appears to be a global savings glut, with owners of capital accepting negative interest rates, actually signals a global capital shortage, as government spending is crowding out massive amounts of investment in productive capital that owners of capital would otherwise make absent government spending. This post by Cowen reinforces Bizarro World economics. Maybe the world we see is the opposite of the world as it really is. Maybe only a few gnostics, like Cochrane, his father in law, and maybe even Cowen, know it and the rest of us are deceived by a world that is not what it appears to be. Sumner I would not describe as a gnostic, smart for sure, a monetarist smart enough to promote market monetarism, which on its face might appear to be an oxymoron (market monetarism?), but only because the “market” part is not meant to be a real market, with the Fed buying and selling bonds, but a virtual market in which there would be no actual buying and selling because the existence of the market itself would obviate the need for buying and selling. Cowen and his fellow gnostics, including his friend Peter Thiel, have been unchained from the reality of the world as it appears to be and have entered the Bizarro World as it actually is. For them, there is no turning back. For the rest of us, do we remain chained to a reality that may not be as it appears to be or do we join the gnostics in a virtual world as it actually is.

50 rayward August 19, 2016 at 5:54 am

No, I’m not being sarcastic. The first step to real knowledge is liberation from what we believe is reality, belief and knowledge being fundamentally different concepts. To give a concrete example, consider “self-driving cars” (in the news today because of Uber’s venture in Pittsburgh). “Self-driving cars” gives the image of millions of autonomous vehicles racing around the streets in the city at 60 or 70 miles per hour. That the image is ludicrous doesn’t mean it’s impossible for vehicles to be autonomous – it just means that will have maximum speeds of maybe 25 or 30 miles per hour (as acknowledged by Google). But what will be the demand for transportation at 25 to 30 miles per hours? The reality is that “self driving cars” is a euphemism for “self-driving transit”, but what’s the appeal in that. “Self-driving cars” is just a term, a term to re-condition people in order to liberate them from their cars. That’s the reality.

51 TMC August 19, 2016 at 9:41 am

Will certainly be 25-30 mph now, which is fine if I want to send my kid to the sitter, ect. Why wouldn’t speeds increase as tech does? I’d love to have the highway only version Tesla can do today. That’d be 80% of autonomous driving’s value to me.

52 Millian August 19, 2016 at 6:23 am

We might have had self-driving cars and hoverboards by now if it weren’t for Obama’s G/GDP thang.

53 ChrisA August 19, 2016 at 6:03 am

On fiscal efforts to increase AD, while I agree that unemployment is low in the US, Britain and Japan, it is still shockingly high in most of Europe. Plus in many European countries there has been a massive reduction in demand, like in Italy, Greece and Spain, versus trend. Remember 30 years ago before the Euro Italy and Spain were challenging the UK as the EU’s 3rd biggest and were manufacturing powerhouses. My belief is it is this which is keeping developed world wages/demand/productivity low. Just looking at one country misses this, in today’s world productive capacity in one country that is not being used affects prices in all countries. Of course the proper solution would be massive monetary stimulus by the ECB not a fiscal response (which would be offset by the ECB and just lead to more debt, Japan is the text book example of this). Tyler should be influencing his friends at the FT more on this, the FT is read by the European elite. Currently the FT is still pretty confused on the whole monetary offset thing, but there are glimmers there of some people who see the proper picture. A second best alternative would be Fed and BOE monetary expansion, I doubt there would be any inflation in these countries until the Euro area began to grow strongly again. But that would be unfair on those countries to solve the ECB’s bungling.

54 Brian Donohue August 19, 2016 at 11:05 am

Germany implemented supply side reforms in 2004 and has since clobbered Southern Europe with its functional economy. Seems like an intra-European thing. Hug your local mercantalist. In retrospect, the single currency doesn’t seem like a good idea. Southern Europe could have devalued and not seen all the jobs go to Germany.

55 Thomas August 19, 2016 at 1:16 pm

Writing zeros on notes doesn’t make physics yield, no doubt to Millian’s surprise. If the physical reality of your regulatory system is unprofitable labor at current technology, no amount of stimulus will change that; you can’t lose on every unit but make it up on volume.

56 Boonton August 19, 2016 at 6:15 am

“My current pet peeve is advocacy of fiscal stimulus without even bothering to consider whether the economy might be at or very close to full employment, much less considering whether the stimulus will target unemployed resources.”

Step 1. Stimulate

Step 2 Evidence of increased inflation? No goto 1, yes goto 3

Step 3. Stop stimulating

57 ladderff August 19, 2016 at 7:56 am

So stupid, so reckless, so devastating

58 Rock Lobster August 19, 2016 at 8:22 am

Step 4: wait for somebody to make immature joke about boners.

59 MOFO August 19, 2016 at 9:13 am

What are your thoughts on the notion of miss-allocation of resources? It seems to my, admittedly, untrained eye that what you are advocating is basically what China is doing. Although their growth is impressive, it seems wholly unsustainable to me.

60 Boonton August 19, 2016 at 9:28 am

It seems very tough to produce a model where operating at less than full employment is justified in order to avoid ‘misallocation of resources’.

I’m also skeptical about misallocation arguments because, well, the market. Direct government spending is a relatively small part of the US gov’t budget. When the US stimulates via fiscal policy it is more often lower taxes and cash benefits for individuals. That means the form of increased demand would be whatever millions of people want to do with their money. This isn’t quite like a mad gov’t plan to try to build a paved highway to the moon causing the entire economy to shift to producing concrete and steel beams.

I think China is more complicated since there you have supply-side socialist policies that are not the same thing as Keynesian demand policies.

But since you raise the subject can we pick up any evidence of misallocation in our WWII experience? There we massively increased demand in WWII AND shifted the economy away from consumer production to war production. After WWII there was a brief period of unemployment when GI’s returned home and for a while there was a lot of cheap surplus war material you could buy if you wanted it but the economy quickly returned to growth and full employment. What evidence was there of a supply side crunch because the economy that was remade to make tanks and bombers couldn’t handle millions hitting the stores seeking new fridges and black and white TVs?

61 MOFO August 19, 2016 at 9:34 am

Thanks for your response.

So your view is that miss-allocation is more a function of *how* you stimulate and not necessarily inherent to stimulation itself?

I have no opinion on post WWII economics, im not an expert, im just some guy.

62 Boonton August 19, 2016 at 10:36 am

I would say it’s almost impossible to get ‘misallocation’ through stimulus. Misallocation would be a supply side problem and would happen through supply side policy problems like government planning.

63 MOFO August 19, 2016 at 10:39 am

But arent a significant number of stimulus schemes govt, planning + govt spending? Our stimulus was, by and large, wasent it?

64 Boonton August 19, 2016 at 10:48 am

By gov’t planning I mean the gov’t literally owning or controlling supply. In the USSR there was chronic shortages of consumer goods. Factory managers, though, could not simply make more goods people wanted because the gov’t viewed metrics of success in terms of things like tons of coal burned, steel rolled or tanks produced.

Stimulus essentially puts money in people’s hands and then those people go out and buy stuff. So what exactly is the ‘misallocation’? I suppose suppliers could gear up to produce one type of thing but discover consumers want something else….but that happens all the time. In a market economy there’s always unexpected hits and misses (plus innovations come along shifting demand into totally unexpected areas) so suppliers should already be ready to change gears as needed.

65 Boonton August 19, 2016 at 10:53 am

Here WWII is a good thing to think about. During the War it was literally impossible to buy a new car no matter how much money you had. Gov’t literally was buying so much all major factories were tooled to produce war materials.

So here you had super stimulus demanding stuff that was totally different from the stuff demanded after the war. If ever you’d see ‘misallocation’ it would be there. Yet the war ended and supply shifted to what people wanted without much of a problem (as well as started expanded into new innovations like atomic power, computers, and other things the war opened up).

66 ladderff August 19, 2016 at 12:46 pm

It’s really unfortunate that otherwise smart, well-meaning people get caught up in this sort of acupuncture-but-with-dirty-needles advocacy.

MOFO, beware: the reason that printing reams of green paper and giving it to your friends seems like it couldn’t possibly solve anything is that it doesn’t solve anything. Remember: inflation is at zero and has been all our lives. In other news, the chocolate ration has been increased—doubleplusgood, eh Winston?

67 C August 19, 2016 at 9:58 am

Edsger W. Dijkstra says that goto statement is a bad idea. It makes for a easily misunderstood code. Consider a for loop instead.

68 ChrisA August 19, 2016 at 6:20 am

On the productivity-AD link, I still think this is possible. I see in the UK there is currently a big dispute over the use of conductors on trains. The train companies want to eliminate the use of conductors on many trains, arguing that the driver can perform the necessary duty of checking that the doors are closed before the train sets off (their argument is that new technology has allowed this be safer than in the past). Of course if this change were made that would increase productivity. This change though is being resisted by the rail staff, naturally who fear losing their jobs. If however demand for train staff was going rapidly, would the introduction of new productivity measures like this be resisted so strongly. When people see strong demand for their services and rapidly rising wages, my hunch would be that new productivity measures would be easy to introduce.

69 Millian August 19, 2016 at 6:21 am

The US economy is only close to full employment if you believe the labour force is at peak productivity and people not in the labour force aren’t interested in joining.

But the dry think-tankers in bow ties have lost this argument in the democratic arena. Trump’s not going around the country to say “actually, people, those jobs are never coming back so be happy with what you got”.

70 TMC August 19, 2016 at 9:51 am

Yes, labor force participation is vital too. I’d even expand the definition to ‘those capable of work’. Too many people not looking anymore, and for most jobs, skills do not get outdated in just a year or so.

71 Hazel Meade August 19, 2016 at 11:13 am

There was an interesting study out in the last few days that showed that Trump support wasn’t really correlated with economic distress , but that it seems to be correlated with local areas of distress. In other words, people who support Trump aren’t more likely to be unemployed or even less economically well off, but they live in communities with relatively high unemployment and economic dislocation.

I think this suggests that Trump support has more to do with changes in local economies caused by global trade and immigration than with actual net measurable economic impacts. People see the factories that have closed in their area and have negative perceptions of that even though their personal fortunes have not fallen.

So we could be close to full employment and still have a lot of people who have economic anxiety due to the rapid pace of change in the last 20-30 years.

72 Boonton August 19, 2016 at 11:19 am

I think full employment has a broader and easier definition. It is the point where the economy responds to more demand by increasing inflation, period.

The unemployment rate is untrustworthy because people could choose to enter the labor force, or people with jobs could work more hours. Productivity isn’t reliable either. In a recession productivity peaks because an employer will shed the worst workers first leaving only the best. As demand expands, an employer will likely see average productivity fall as he will accept in workers who are below average.

If ‘peak productivity’ is full employment then every professional sports draft would stop with the first pick. Once a team gets the best player, every additional player picked would just lower the average!

73 Boonton August 19, 2016 at 6:53 am

Job creation sped up when the extended UI benefits ended at the beginning of 2014, contrary to the prediction of Keynesians.

Fed was also keeping rates low and doing QE plus if I recall unemployment extensions depended upon whether a state already was below or above the national average. That means the phase out of UI extensions was done by hitting the states with better unemployment first so it isn’t clear if the phase out happened before job creation growth or if UI was phased out as job creation accelerated.

74 TMC August 19, 2016 at 9:54 am

2013 Govt shut down may have helped. Businesses may have hoped they be smart enough not to start it back up.

75 Boonton August 19, 2016 at 11:00 am

The 2013 shutdown lasted for two weeks in October. I don’t think it would have been even a blip on the radar for the economy as a whole.

76 TMC August 19, 2016 at 4:54 pm

No, but I was sure hoping they’d forget where the On button was and all have to go home from DC.

Made ME a little happier anyways.

77 Boonton August 20, 2016 at 10:26 am

Why? How was your life different for those two weeks versus the two weeks before or after?

78 Brian Donohue August 19, 2016 at 11:10 am

Stop the hand-waving. Only a PhD could argue that generous unemployment benefits don’t result in higher unemployment.

What about the $600 billion fiscal consolidation in 2013? According to your model, that sent us back into recession.

79 Boonton August 19, 2016 at 1:13 pm

Spending per person in 2012 was $18,579. By 2014 it was $17,800. So that’s a loss of $779 per person.

Deficits per person in 2012 was $3289 and in 2014 it had fallen to $1398.

So the ‘consolidation’ was a rough decrease of $1891 per person whose loss was $779 in spending and $1,112 in higher tax payments. So you’re right that is contractionary by itself

How much of that happened to the economy versus with the economy? For example, between 2010 and 2014 about 6M jobs were added. So that pushes up tax payments ‘per person’ versus simply taking an existing population and just hiking their taxes by $1112.

I think if you tease out the actual austerity imposed you’d find it much smaller than the headlines back at the time talked about.

80 Lee A. Arnold August 19, 2016 at 7:38 am

Tyler, Quite aside from the questionable assertions that the 1930’s have any bearing on today’s experience, or that we are anywhere near “full employment” (or that the definition of “full employment” is particularly relevant or interesting): Considering your more fundamental underlying assumption that everything will work according to the basic old plan of economics, if we were only to return to the “first principles” such as “incentives matter” — despite 1. evidence that the economy may be transforming into something in which individual incentives matter very little indeed, + 2. evidence that the basic trend in productivity is rather unrelated to economic policy in favor of more fundamental causes such as the historical and circumstantial relation of scientific knowledge and human organization to the needs and wants of humans, + 3. evidence that the surge in GDP growth before our Lesser Depression was the after-froth that was spun-off from a huge price buildup in assets (i.e. mortgage derivatives and housing) for the want of more productive activities — aren’t you guys just whistling past the graveyard of your academic speciality?

81 Ray Lopez August 19, 2016 at 8:52 am

Exactly. Keep in mind most of what is invented today at the cutting edge is under employment contracts that assign to the employer (corporation) any and all inventions done by the employee, no matter how valuable. Nobelist Kary Mullens of pcr DNA replication fame, which spawned the entire biotech industry, got $10k USD for his invention. He says he made about $400k from being an expert witness in patent trials, but that’s hardly compensation. And don’t tell me that ‘but for the lab equipment supplied by the employer, the invention would not have happened’. That’s bunk. Erlenmeyer flasks cost nothing these days.

For the above reason, some inventors try to (illegally I may add, but usually not prosecuted) take with them any trade secrets they come up with while working and start their own company. But that’s a poor substitute to having a sound patent policy, which no country in the world has ever had, with the US/UK/Germany/Japan coming the closest.

82 MOFO August 19, 2016 at 9:19 am

While i agree somewhat with your claims about patents, modern invention typically takes more than a bit of glassware to pull off. I think you are grossly underestimating the cost of non software invention.

83 Ray Lopez August 19, 2016 at 10:30 am

@MOFO – Not really, from my experience visiting R&D labs. Tell me what the most expensive piece of equipment is? Maybe the mass spectrometer machine ($300k)? But, just Googling this, I see prices are now down to $100k (2008 article)

What are your thoughts? I hope you don’t say something like “the entire multi-billion dollar semi fab” as an example, since in practice feature sizes are shrunk to perfection in semi fabs (though often the initial work is done on a PC with software).

BTW, thank you for the support. It’s rare anymore to see any support for patents (patents = trolls to most laypeople, or something absurd like keeping the severed head of a monkey alive). This is even IMO at the upper echelons of management. Most people are thinking like infringers (‘just sue me and we’ll fight it out in court’) or marketers (‘being first to market is more important’). I even saw how Nicola Tesla thought his patents (he had over 700) would save him in any fight against Marconi, over radio, since Tesla thought Marconi was infringing seven of his patents (they did not save him, he lost in a case that went all the way to the Supreme Court). A study in my hard drive found that inventors only reap about 5% of the true worth of their invention to society, and getting that 5% can be tough (drove TV pioneer Armstrong to suicide). AlexT, TC, most economists have no problem with that. That’s fine, but they should not be teaching “people respond to incentives” as the Mankiw textbook says. People do not, and that’s not the way society as it exists now works. Be honest about it and I have no problem with your views. I agree to date much if not most progress has been done by altruistic and/or idealistic inventors, without the aid of patents.

84 MOFO August 19, 2016 at 10:37 am

Depends on the field. Medical device manufacturing of various types is the only field i have any real experience in which can range from not too expensive to really fucking pricey depending on what you are doing.

Also, it will depend on what you consider to be ‘invention’. Coming up with an idea and testing it is only the first step in a long process. Is translating that proof of concept into a manufacturable product invention? How about refining and improving on that product?

85 Jeff R. August 19, 2016 at 9:24 am

What is this brave new world where incentives don’t matter anymore?

86 Lee A. Arnold August 19, 2016 at 9:59 am

See how Schumpeter describes the withering away of incentives it in Capitalism, Socialism and Democracy.

87 Art Deco August 19, 2016 at 10:30 am

evidence that the surge in GDP growth before our Lesser Depression was the after-froth that was spun-off from

Real GDP grew during the period running from the 3d quarter of 2006 to the 3d q of 2007 at an annual rate of 2.3%. From the 3d q of 2005 to the 3d q of 2007, the rate was 2.24%. Between the 2d q of 1991 and the 2d q of 2009, the mean annual rate at which GDP grew was 2.65%.

There was no surge.

88 Lee A. Arnold August 19, 2016 at 12:00 pm

2006 started the crisis. Five years before that, house prices and mortgage derivates started steep ascent & real GDP went above potential.

89 The Engineer August 19, 2016 at 8:45 am

Once again, I can’t believe I’m the first to say this…

Our corrupt elites are wrong about everything they advocate. Vote Trump to make America great again.

90 jonfraz August 20, 2016 at 9:50 am

Trump is every but as much a “corrupt elite” as the rest of them. Believing he would make a difference is delusional

91 Edgar August 19, 2016 at 8:48 am

Give Alberto Mingardi credit for calling out these fallacies as well. “Ok, so, if you want to let the price system work to try to solve problems whose solutions is still unknown to us, you’re an ideologue. If you want a club of enlightened bureaucrats to step in, you’re not.” He has been a lot more engaged in pushing back against the likes of Mariana Mazzucato who advocates all those ideas that Sumner identifies than Tyler who seemed to fawn over her:

92 Edgar August 19, 2016 at 9:12 am

No criticism of Tyler intended. Playing both sides against the middle is the smart play when looking to increase donor support. Also, with a highly politicized IRS one can’t take their 501(c)(3) designation for granted.

93 Edgar August 19, 2016 at 9:56 am

No criticism of the IRS intended either. 501(c)(3) tax expenditure bandits are entirely a creation of the federal tax code and should be subject to the same democratic controls and processes as any other federal program.

94 Millian August 19, 2016 at 9:13 am

How did the price system work in 2004-08?

95 MOFO August 19, 2016 at 9:22 am

Seems like it was responding to the incentives in place at the time.

96 derek August 19, 2016 at 9:34 am

What price system? The GSE’s were 40% of the mortgage market. A 30 year fixed rate mortgage is no child of a market but of a government bureaucracy.

97 Edgar August 19, 2016 at 9:57 am


98 Art Deco August 19, 2016 at 10:20 am

The GSE’s had a number of privileges and were very politically connected. Fannie Mae and Freddie Mac were private companies from 1968 to 2008. The smaller ones (Ginne Mae and FarmerMac) remained public enterprises IIRC.

99 derek August 19, 2016 at 11:28 am

Sure. A great way to get the backing of the US Treasury all the while being able to make millions as CEO. Private when it comes to paying me, public when it comes to paying for the risk

100 LK Beland August 19, 2016 at 9:43 am

About productivity during the great depression: TFP fell by nearly 20% from 1929 to 1933.

This was largely the case all across the world (see page 51):

101 Benny Lava August 19, 2016 at 10:39 am

This is a great point. Though I largely agree with much of Sumner’s criticisms as usual he goes too far. And Tyler is off the mark as one who advocated for austerity and has the evidence come back to the contrary.

I wish economists would look at the evidence and change their theories to fit the facts.

102 efcdons August 19, 2016 at 12:18 pm

But the model! Don’t you understand, they have numbers.

103 Ricardo August 19, 2016 at 10:14 am

“The claim that extended unemployment benefits—paying people not to work—will lead to more employment, by boosting AD.”

Extending unemployment benefits might increase the duration of unemployment by a bit but shouldn’t (theoretically or empirically) lead to long-term unemployment. On the plus side, temporary unemployment benefits mean unemployed people don’t have to cut back their spending as drastically as they would otherwise which is the AD effect. What is the evidence that the possible increase by a few weeks of duration of unemployment outweighs job creating and retention in the consumer sector (e.g. the supermarkets, clothing stores, auto repair shops, etc. where unemployed people spend money)?

104 Art Deco August 19, 2016 at 10:18 am

Economists used to refer to ‘automatic stabilizers’. I been out of school a while. Has this notion been abandoned?

105 Brian Donohue August 19, 2016 at 11:14 am

I don’t think so. Then again, the recovery proceeds, millions are back at work, yet the deficit keeps creeping up.

Automatic stabilizer talk is more appealing to Keynesians during the troughs.

106 Ricardo August 19, 2016 at 1:50 pm

“yet the deficit keeps creeping up”

Um, no. The deficit has declined in absolute dollar terms and as a percentage of GDP every fiscal year since 2011. In terms of percentage of GDP, the budget deficit for FY 2015 stood at 2.5% where it also stood back in 2005.

107 Komori August 20, 2016 at 11:46 am

Of course, 2011 was, what? The third-highest post-WW2 deficit? The others being 2009 and 2010? Starting your measurement from basically the biggest outlier you can find is a bit disingenuous.

108 Hazel Meade August 19, 2016 at 11:02 am

Can we make a distinction between preventing AD from falling as rapidly as it otherwise would and boosting AD?
When a person goes on UI, they make (and spend) less than they did when employed. Thus UI always exists in a context where AD is lower than it was when they had a job, and (usually) lower than it would be if they got another one. AD that falls less rapidly than it otherwise would is still falling. UI cannot cause a net increase in AD by definition, unless a lot of people are brazenly gaming the UI system.

109 Art Deco August 19, 2016 at 10:16 am

5. Fiscal stimulus can boost AD when not at the zero bound, because . . . ? In all five cases there is almost no theoretical or empirical support for the new voodoo claims,

I seem to recall reading literature reviews regarding studies on multipliers which found them to be variable, generally weak, but not nil or negative.

Martin Feldstein was recommending fiscal stimulus late 2008 and early 2009. He offered the simplest and most effective way to accomplish this would be to step up purchases of military equipment (noting how much had been destroyed in Iraq and Afghanistan). He noted also that the Democratic Congress had almost no interest in military expenditure. (Hence the porkulus).

110 Ricardo August 19, 2016 at 2:04 pm

Whether you think they expressed interest or not, the reality is that military spending increased in absolute dollar terms and as a percentage of GDP in fiscal years 2008, 2009 and 2010. Military spending in 2010 stood at 4.7% of GDP which is higher than it ever was not just during the George W. Bush years but also for every year since 1993.

111 Edgar August 19, 2016 at 6:05 pm

YMMV by deficit funding and stage of spending cycle measured.

“Most of the discussion about fiscal stimulus focuses on the multiplier of government spending on impact. In this paper we shift the focus to the multiplier at the end, i.e., to the period in which a deficit spending program terminates. We show that recent time-series analyses and neoclassical as well new Keynesian business cycle models predict that the multiplier turns negative before spending expires. This means that aggregate output at the time of expiry of fiscal stimulus is lower than it could be without deficit spending. Here, we show why this phenomenon is a general outcome of mainstream business cycle theory and explain the underlying mechanism. Using phase diagram analysis, we prove that the aggregate capital stock at the time of expiry of fiscal stimulus is lower than it would be without a deficit spending program. This fact explains why aggregate output is below its laissez faire level as well.”

Per “The Spending Multiplier in the Medium Run” by Strulik and Trimborn in the German Economic Review , 17 May 2016

112 chuck martel August 19, 2016 at 10:48 am

The reality is that UI has been and is rent/mortgage/car payment insurance and has little to do with consumer spending. Unfortunately, the maximum weekly UI payment, even in states as charitable as Massachusetts ($698) and Washington ($637) won’t cover the exorbitant rents and mortgage payments in these locations as well as purchases of food and payments on the Prius. The hoi polloi have been conditioned to think that it’s stupid to save and even dumber not to borrow so millions of dull/normals have already spent their paychecks long before the pixels are added to their bank accounts.

113 GoneWithTheWind August 19, 2016 at 11:04 am

Regardless of what is claimed to be the reason for these Keynesian steps the real reason is all about politics. The regulations, mandates and political choices of the last 50 years has brought us to the brink of a economic crash that many believe will be worse than 1929. A worldwide depression with all the suffering and deprivation of a biblical disaster. The politicians and bureaucrats who looking into the maw in 2009 were shaken and afraid. What we see today is the propping up, the grasping at straws, the vain efforts to reverse it or at least postpone it somehow. It evolved over the last 7 years into simply kicking the can down the road until someone else is in charge. We are living in a bubble and it is only a matter of time until it bursts. I think most intelligent informed people realize this and many of them are preparing for it. I would wager that almost every congressman and high level bureaucrat has an escape plan. Perhaps a home in Ireland or New Zealand. A stash of PMs and offshore accounts in Switzerland. A plan to get out of Dodge ahead of the guillotine and the noose when the peasants in flyover country finally understand what has been done to us all. It will all go bad and your leaders have an escape plan, do you?

114 August Hurtel August 19, 2016 at 11:11 am

6. Targeting NGDP is going to help.

115 Adam August 19, 2016 at 11:58 am

How about we just fix our crumbling infrastructure for it’s own sake and if it turns out to have a stimulus effect, by drawing more low-skill men back into the labor force, then great.

116 derek August 19, 2016 at 12:14 pm

I hear an echo. Oh yes, Jean Chretien, 1993? He said that the rumble of dump trucks would generate economic activity.

A year later reality hit. Canada was facing the possibility, a real one, that no one would lend them money to fund the deficit that would pay for all those dump trucks. So the Liberal government balanced the Federal government books mostly by cutting spending. It laid the foundation for a quarter century of growth that has now come to an end, oddly coinciding with the Federal and Provincial governments returning to the habits of deficit spending.

The US has been applying stimulus by deficit spending every year except maybe one or two during Clinton Gingrich in the late nineties, which also happened to coincide with a period of economic growth.

I wonder how that happened?

117 Adam August 19, 2016 at 12:56 pm

You’ve got the causation exactly backward there.

118 E August 19, 2016 at 12:03 pm

If I only knew what AD stood for.jeez.

119 karl August 19, 2016 at 2:55 pm

Anno Domini. What it has to do with economics escapes me.

120 derek August 19, 2016 at 12:08 pm

Obviously the solution to a sovereign debt crisis is to borrow more money.

Obviously the solution to an expensive and unaffordable regulatory state is to borrow more money to pay the regulators.

Obviously the solution to a financial system that cannot price risk is to assume the risk and bail them out.

It will all work out fine for those in a position to make the decisions. Unless they built their mansion on a beach somewhere which is an indefensible position. The only comfort is to imagine that no one would ever think of trying to take them out.

121 byomtov August 19, 2016 at 1:40 pm

Just a few questions:

In following the links I find that Sumner and Kling seem to think that current wage rates are “natural,” ordained by the workings of an idealized “free-market” economy. Hence things like minimum-wage laws “distort” them, and are “artificial.” Sez who? Do they really believe there are no artificial or distortionary factors affecting current wage levels?

Is the effect on AD of extending unemployment benefits the only reason such a policy is worth considering? And why does giving people money to spend not increase AD?

What is wrong with increasing employment? Productivity is a bit of a red herring here. As I understand it it represents output per unit of input, hence is a per capita measure. But if we increase employment, thereby increasing total production, while probably reducing productivity (because the marginal worker will have below average productivity) are we not better off?

122 mulp August 19, 2016 at 2:19 pm

That both believe the government should pay the living costs of everyone instead of requiring employers to pay workers enough for workers to survive means they know low wages are a labor market distortion.

Imagine you replace “worker” with “corporation” and we know that economists convinced the Supreme Court that corporations are people, then every corporation should get a basic income so it can operate when it’s costs exceed it’s revenues.

123 karl August 19, 2016 at 3:03 pm

In a sense, the financial benefits of incorporation can be seen as income. I think some people around here call such benefits “incentives” (to which I, as a lone prole, am not entitled).

124 mulp August 19, 2016 at 2:06 pm

“My current pet peeve is advocacy of fiscal stimulus without even bothering to consider whether the economy might be at or very close to full employment, much less considering whether the stimulus will target unemployed resources.”

In other words, Trump and supporters are totally Wrong!

The economy is fantastic with employment so high that anything that requires one more workers to be hired will trigger massive waves of job hopping for higher wages touching off high rates of inflation.

After all, carrying hod for a bricklayer requires a master’s degree and the flag person controlling traffic a doctorate and construction jobs just can’t provide jobs for school drop out.

125 Donald Pretari August 19, 2016 at 2:28 pm

“My current pet peeve is advocacy of fiscal stimulus without even bothering to consider whether the economy might be at or very close to full employment, much less considering whether the stimulus will target unemployed resources.”

That’s my view, as well. I post on 2008 policies quite a bit because I fear memories are fleeting. I would advocate a Guaranteed Income of some sort, Narrow/ Limited Banking of some sort, and a Rule Based Monetary Policy with some room for adjustment on clearly stated grounds. I suppose I am committed to declining debt and budget expenses during an economic upturn, but I’ve no idea how to ensure that.

126 Mike Hansberry August 19, 2016 at 10:26 pm

No problem, uncle sam will just guarantee declining debt and budget expenses during an economic upturn, same as he will guarantee on income for all.

127 Paul Ball August 19, 2016 at 4:28 pm

Interesting view!

128 jka August 20, 2016 at 8:54 pm

A healthy military industrial complex, is a healthy America.

129 Tom Warner August 21, 2016 at 5:24 am

I’ve said it before but I find it impossible to take seriously criticism of fiscal stimulus from proponents of NGDP targeting. There is no way to target NGDP without engaging in some kind of de facto fiscal stimulus. What you call “expanding the range of assets the central bank is allowed to purchase” seems to mean the CB buying corporate bonds, and inevitably, creating rules re: which bonds will be purchased.

130 instagram online free no download August 22, 2016 at 7:02 am

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131 Troll me August 22, 2016 at 11:15 am

1) Not always, but maybe sometimes. Need an open mind for this one.

I wouldn’t count on a positive AD effect, however, and think that

minimum wages should be defended by different reasoning.

2) The logic must be about the same as #1. But on the matter of

extended unemployment benefits, it is extremely important not to

forget that higher quality matching happens when you have more time

to find a job. I wouldn’t go so far as to say that the overall

direction of effect is always positive, and clearly the effect will

depend on the overall magnitude of the unemployment insurance


Thing is, I don’t think many economists really have a clue what it’s

like to have to take a crap job to pay bills and then have no

time/energy to look for something better or go learn new skills.

Compare the situation of needing a job NOW to pay bills as opposed

to having 6 month of unemployment benefits.

Now, I’m sure not sure about the SIZE of unemployment benefits. They

should not be so large as to prevent people from looking for work

for the first weeks or months, but they should be large enough that

people can feel comfortable with that for a period of time while

looking for a suitable job match.

3) Insane claim. It may be beneficial (debated) for long-term growth

or long-term debt by averting the economic collapse and its effects

on the tax base, but to claim that deficit spending wil reduce the

deficit? I wonder … perhaps Sumner misunderstood the arugment

being made? I’m quite sure that he wouldn’t intentionally

misrepresent the situation, but I’d be surprised to know that the

types of serious people who might get his attention would be able to

sustain just a belief.

4) Recall, many people believe there is still slack in the economy.

Which would show up in the data as productivity growth. Sounds like

it’s poor decisions of which variable to discuss, not the underlying

logic, which is flawed.

5) Of course stimulus can boost AD, assuming that the economy has

some slack (and even somewhat so if not, but this would lead to

rapid overheating). But what does the zero bound have to do with

that? I thought the main concerns were normally about

Of course, all of these will be falsified in some conditions but not

others. If it’s at least in the right direction 90% of the time,

then something’s going good.

But “voodoo” is completely the wrong word for rare situations,

unless, of course, it is being suggested that such logic applies in

general cases. With the exception of #1 (and ignoring #3), there is

quite a variety of evidence and theoretical argumentation which

shows that these may be very sensible at times.

Strongly agree about the non-politicization of such topics. As impossible as it sounds to very many people, quite a lot of people in positions of responsibility on such research in fact believe that keeping the politics out of their research is critical. Of course, even with the best of efforts everyone still has biases, but there are many who try. Then again, if a particular party wants to do something you think is complete idiocy, then by all means remaining quiet in order to stay apolitical is not a good idea, imo. Because, then, what professional credibility could an economist have were they to fali to criticize a policy in their specific area of research if their research leads them to believe that it is a bad policy?

132 required August 23, 2016 at 9:23 am

“topic is far too important to allow it to become so politicized.”

For politicians:

Important = Politicized.

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