Category Archives: Economic theory and policy

Krugman v Moore discussed by Moore

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I did a live blog of the debate between Paul Krugman and Steve Moore at Freedomfest on July 10, and now there is a first person account from Steve Moore himself. Here are the bits on Keynes and the stimulus:

Last week I debated New York Times columnist and Nobel-prize-winning economist Paul Krugman in front of 2,000 people at FreedomFest in Las Vegas. It was billed as the economic showdown of the year, and the major theme was socialism vs. capitalism.

Given the financial turmoil in Greece, Puerto Rico, Argentina and most of the eurozone, it would be hard to think of a worse time for Krugman to be defending big government. . . .

The first issue we squared off on was “stimulus.” My point was that Obamanomics gave America the weakest recovery in at least three generations and is running $2.5 trillion in GDP and 8 million jobs behind the Reagan recovery.

Krugman’s response was that the 2008 financial crisis was so catastrophic that 2% growth was the best we could expect. Except that even the Obama administration admits that the recovery turned out weaker with the stimulus than we would have seen without it.

During the debate Krugman called John Maynard Keynes one of the two greatest economists of all time. But when Keynesian economics was put to the test by Obama, it crashed. . . .

My big takeaway from the debate is that advocates of free-market capitalism need to aggressively call out the Krugman-Obama-New York Times-Hillary Clinton-IMF crowd for bringing misery and decline to so many places around the world with their wildly irresponsible debt and spending policies. They’re on the run because their model is imploding right before our very eyes here in the U.S. and around the world.

Perhaps worst of all, their obsession with income inequality and spreading the wealth is only making the poor poorer, and driving the middle class downward, as even Clinton herself acknowledged this week. Krugman and his followers are on the losing side of history. No wonder he didn’t want this debate televised.

I also think that Keynesian economics is under pressure because of the disastrous outcomes everywhere the stimulus was tried. But I hardly think we have seen anything like the knockout blow that is needed. Lots of people still defend Keynes and the stimulus. In fact, next month I will be in a debate in Melbourne on the stimulus versus “austerity” where the other side will be taken by the Chief Economist of one of our major banks (as part of the Policy in the Pub series run by the Economic Society of Victoria – details to follow). Whatever may be Steve Moore’s impression, my own judgement is that Keynesian economics has ended up more entrenched than ever, as bizarre as that may seem. However, do read the comments thread that comes with Steve’s article since there are plenty of people who understand perfectly well how rotten to the heart Keynesian theory is.

[My thanks to Allan in San Francisco for sending this along – I, however, am happily now back home.]

John Stuart Mill was not a socialist

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The discussion on the economics of John Stuart Mill and its relevance to modern economic management continues on the Liberty Fund website. The latest two contributions, dealing with Mill’s socialism, have been posted by Richard Ebeling and Nicholas Capaldi. The entire thread from start to finish may be accessed here. This is my third contribution which I have just sent off.

Let me make a number of points on Mill’s “socialism”.

First, Mill did not let the cat out of the bag that there were iron laws of production but no similar laws of distribution. Making such a common sense distinction explicit did not invite others to nationalise industries or introduce central planning. Mill is not the father of socialism. He is amongst socialism’s greatest enemies, in spite of what he might have said himself.

By insisting that there were laws of economics, Mill was explaining that there were limits to what could be done by political decree. Economic laws are no different from the law of gravity. They provide a theoretical structure of forged steel that determine what cannot be done, and guidance towards an understanding of how economic policies must be designed if they are to create wealth and prosperity.

Mill’s four propositions on capital provide some of these laws. Economic growth requires increased investment. Increased investment requires increased saving. Employment cannot be increased by increasing aggregate demand. These were constraints against which policy has to be framed.

Mill was writing in the middle of the nineteenth century. He had never actually seen a socialist economy in existence. What is therefore remarkable is that he was as explicit as Mises would one day be, who had seen such things, about the impossibility of running a successful economy from the centre. Instead, Mill wrote, “laissez-faire, in short, should be the general practice: every departure from it, unless required by some great good, is a certain evil.”

Both Richard Ebeling and Nicholas Capaldi have noted Mill’s emphatic opposition to individuals voting for a living. I see Mill’s “socialism” as an early advocacy of the welfare state, in which the rules of the game were designed so that individuals could become productive, and to that end might be assisted by actions taken by government. He left the question of the practicalities of socialism open as a matter of trial and error but cannot, in my view, be implicated as a defender of socialism in any of the forms ever experienced since his time.

This is the crucial point: there are some actions that cannot succeed because they are contradicted by economic laws. Therefore, if they are tried, they will not achieve their aims but will, instead, cause economic conditions to become worse.

Mill is very specific about a number of such economic laws that rule out many of the policies advocated by modern Keynesian macro models. Mill gets these things right, while Keynes, along with much of modern macroeconomic theory, gets them wrong. Indeed, I go further. I argue that not only are Mill’s conclusions right, so too is his reasoning. In my view, you will learn more about how to manage an economy successfully by studying Mill than from any modern-day Paul Samuelson clone.

Paul Krugman vs Steve Moore

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Live from Freedomfest in Las Vegas, a debate between Paul Krugman and Steve Moore. The official title is, “How can we restore the American Dream?” which, no doubt, will enter into the issue of economic management and Keynesian theory. We shall see. This is a live blog.

First question, why are we struggling?

K: Worst financial crisis – cut public spending too soon. Lots of wealth created but not much trickling down. Income inequality is a problem.

M: Agrees with K over the level of intervention. Bailouts were a mistake. Stimulus did not create jobs. Obamacare a mistake. Lots of problems. We had a Keynesian experiment that did not work. Reagan v Obama; Reagan turned out well. Obama thought the govt was the solution.

K: Problem for Reagan was inflation. Obama problem was a slowdown in activity. Different problem. If that’s your best answer, you have no answer. Stimulus v austerity you can see a strong positive correlation between spending and growth. The Obama stimulus was not huge; about 2% of GDP at its max. Wasn’t enough. Needed more as often stated.

M: Economists on the left used the Keynesian playbook, and it happened and it did not make a dent in our unemployment. Would more have been better. No one believes that. Reagan was also dealing with a recession. Tax cuts led to a recovery. Obama policies did not work according even to their own estimates.

K: Obama’s predictions was not my prediction. Aftermath of financial crisis is always slow. There is only a few times we need govt intervention. The Reagan policy was one when you did not need one. In 2008-09 we did.

Q: Is the private sector being stifled by excessive regulation?

K: Obamacare is a hybrid. Working quite well. Would like to have a single-payer system. Private companies are the conduit. Bad process. Has turned out to be cheaper than expected. Not blowing a hole in the budget. Repealing Obamacare would lead to a blow out in the budget.

M: Education and healthcare are govt dominated and that is where the costs have risen the most. Third party payments drive up costs. Premiums are blowing out. What about the tax on medical devices?

K: Healthcare costs rise because of innovation. Therefore costs go up. Everywhere else has lower costs where there are national health care. Govt intervention is more efficient than private. Third party payments are a problem.

M: Competition missing.

K: No one goes comparison shopping after a heart attack.

Q: Labour participation rate is low – minimum wage laws. Should they go up?

K: A place I have changed my views. Raising the minimum wage a lot will cost jobs. However, cannot find evidence that higher minimum wages cost jobs. Happy with $15 per hour and if no impact then up to $20.

M: Mostly about kids who are being locked out. Sinister trend. How bout a teenage minimum wage?

K: No evidence that I can see. Re teenagers – I’m willing to think about it but I am against over-complexity of the legislation.

Q: Red State v Blue State job creation.

M: Red State have more free market policies and more employment growth. Lower taxes in red states. Less regulation.

K: Red State employment growth better than in Blue State. What determines who grows faster? Warm winters! Air conditioning is changing employment patterns. The one policy that makes the difference is land use policy. Restrictive land use policies raise housing costs. The factors that matter are:

. weather
. land use policy

Regulation doesn’t matter as much.

M: What about the policies?

K: People like to live where they can buy houses.

M: What about Greece?

K: Advocate of a strong social safety net. Not a big government guy. Govts do a terrible job with the steel industry or the post office.

Q: Favourite economist: Smith, Keynes or Marx?

K: No brief for Marx. Favourite economists Smith AND Keynes. Must sometimes protect the public interest through regulation. With Keynes understand why economies go off.

M: JEL article on The Age of Milton Friedman. My problem is that we live in the Age of Keynes. When have they ever worked?

Q: Welfare Reform Act. Should we attempt to lower welfare.

K: Dispute the premiss. No upward trend in welfare dependancy until the GFC. Then the worst slump and the safety net programs. Alleviated some of the worst suffering. We are not creating a welfare class. You may want to believe it but it’s not true.

M: Post 1996 Welfare Reform Act number of people on welfare fell.

K: Not hardline against welfare reform. Now we have no system for providing income. I think of this as fairly trivial. Food stamps and Medicaid both work and don’t see much need of change.

Q: What three policies would you advocate to restore the American dream? How about privatisation of social security and education.

K: 1) Land use restrictions need to be reduced. Cheaper housing needed.
2) Program to promote equality. Born into a lower class family will reduce future income.
3) Empowering workers, with minimum wage at the start. Increase the bargaining power of unions.

M: Need to help the middle class. And unions contaminate everything they touch.
1) Voucher to every child in the country to promote advantage.
2) Ownership of their own companies.
3) 16-17% flat tax rate.

End discussion. Questions from the floor.

Q: Why health care costs going up and benefits going down?

K: Obamacare has been a lifesaver for certain people. Some people are paying more, but overwhelmingly the effect has been positive.

M: Republicans will change the system. Need more choice.

Q: Debt and deficits

K: Debt levels and growth high correlation, but what is the causation? Debt levels should not be a preoccupation. High debt without one’s own currency is a problem. We are many many percentage points away from a maximum load and it is falling.

M: Depends on what you buy with the debt. Should use debt to finance lower taxes. Low interest rates is what is keeping the country going.

K: The private sector was deleveridging. The lack of spending is why we have a recession. If everyone is cutting back to retain income where will the demand come from? The deficits saved the world from a great depression. Compared with what happens in your ordinary financial crisis, the GFC was not bad.

M: Obama recovery was the worst post-war recovery.

Keynesian policy in the United States

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july 4 washington

In Washington, and went to the Mall last night for the fireworks. The best fireworks display I have ever seen, the sky was at the end entirely covered with colour and sound. They were even able to send up in the middle of it a set of rockets that, when they burst, spelled out “USA”. But the very few chants of “USA” also died away as quickly as the fireworks. There’s too much reality around at the moment.

As to reality, there is, of course, this:

Even after another month of strong hiring in June and a sinking unemployment rate, the U.S. job market just isn’t what it used to be.

Pay is sluggish. Many part-timers can’t find full-time work. And a diminished share of Americans either have a job or are looking for one.

The rest of the article is fumbling idiocy as the journalist tries to explain away the actual reality of the American labour market. You need to contrast this great Keynesian disaster with the last time a classical policy was applied in the US.

Beginning in January 1920, something much worse than a recession blighted the world. The U.S. suffered the steepest plunge in wholesale prices in its history (not even eclipsed by the Great Depression), as well as a 31.6% drop in industrial production and a 46.6% fall in the Dow Jones Industrial Average. Unemployment spiked, and corporate profits plunged.

What to do? “Nothing” was the substantive response of the successive administrations of Woodrow Wilson and Warren G. Harding. Well, not quite nothing. Rather, they did what few 21st-century policy makers would have dared: They balanced the federal budget and—via the still wet-behind-the-ears Federal Reserve—raised interest rates rather than lowering them. Curiously, the depression ran its course. Eighteen months elapsed from business-cycle peak to business-cycle trough—following which the 1920s roared.

At the end of my Say’s Law presentation to the Keynesian symposium I attended at Dartmouth I was asked to explain why a classical policy works, which it does. And the fact is, the presuppositions are so different that it is almost impossible to latch onto the differences. If these things interest you – and I am all too aware how few actually, really are – go to my lead article at the Liberty Fund and carefully read the section that deals with the diagram I have there. There you will find macroeconomics before Keynes summarised in less than 1000 words. This is the theory that sat under the policies of the early 1920s. Hoover, and then Roosevelt in spades, a decade later would introduce “Keynesian” policies, the first of many such failures in a policy that has never had a success.

My lead article on John Stuart Mill at the Liberty Fund

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It has been a great honour for me to have been asked to write the lead article for the Liberty Fund online discussion forum for July 2015, which is on the economics of John Stuart Mill. The article has now been published and may be found here. It will be followed by commentaries from three of the world’s great scholars on Mill, after which there will then be open discussion thread from readers. The following is the Liberty Fund’s introduction to my article and the three commentaries:

In this month’s Liberty Matters online discussion we reassess the economic ideas of John Stuart Mill as found in his classic work Principles of Political Economy (1st ed. 1848, 7th ed. 1871) and other writings. In the Lead Essay by Steven Kates of the Royal Melbourne Institute of Technology it is argued that in the light of the evident failures of Keynesian economics to solve the problems of the boom and bust cycle, and that of ongoing high unemployment and economic stagnation, that we should go back to Mill’s “Four Propositions on Capital” for enlightenment. In Kates’s view there is “more insight into the operation of an economy than any of the Samuelson clones that have been published to explain what Keynes meant in trying to raise aggregate demand.” The commentators are Nick Capaldi, the Legendre-Soulé Distinguished Chair in Business Ethics at Loyola University New Orleans; Richard M. Ebeling, the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina; and Sandra J. Peart, who is dean of the Jepson School of Leadership Studies at the University of Richmond.

If nothing else, this article and the three commentaries should alert you to the virtual certainty that modern economic theory is not even near being the best economics there has ever been.

Hiding the decline in employment

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Here’s a story I wouldn’t normally have looked at, Hillary Clinton to campaign in Hanover Friday, but seeing I will be in Hanover on Friday, am there now, it sprang off the page. More detail:

Democratic presidential candidate Hillary Clinton will visit Hanover this afternoon at 12:30 p.m. and speak at a “grassroots organization event,” according to Clinton’s campaign website.

This is not, need I point out, Hanover in Germany, but Hanover in New Hampshire, where may be found the campus of Dartmouth University. I am here for a small symposium on Keynes, but was all set to abandon ship, except that this “grassroots” event is more like the “tallest poppies” event, in that it would cost thousands to get in the door. Will therefore stick to Keynes.

Which brings me to the latest news on the American economy, this from Drudge – and you will not find the first part of this anywhere near the front of The New York Times, or USA Today, but you will find the second.

Record 93,626,000 Not in Labor Force…
Unemployment rate drops to 5.3%…

Rush Limbaugh did a take on this today as well, where he discussed the disastrous labour market in the US, where the stats keep showing improvement despite the vast disappearance of jobs:

Twice as many people left the workforce in May as found jobs, which cancels out the 223,000 jobs created. If 223,000 jobs are created and 432,000 jobs were lost, would somebody explain to me where all this job creation is? Now, the AP and the rest of the Obama sycophant media is not telling you about the decline in the labor force. Some are talking about the labor force participation rate, and they’re relying on the fact that most in the low information category are not going to understand it. “Labor force participation, what’s that? It doesn’t matter to me, Mabel.” All they’re going to hear is the unemployment rate is 5.3%. (laughing)

I laugh too, but it’s not funny at all. But Obama has ramped up welfare so that people do not starve to death in the street, but the numbers are shocking.

And what’s it got to do with Keynes? Everything, alas, but where are the economists to point it out. They must be working at the bureau of stats in this massive effort to hide the decline.

Greek fire

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I have been asked to comment on Greece and the Euro, seeking 1000 words by Thursday. Too busy really, but this was the overview of what I might or might not write:

My view is that Greece should stay in if they want the discipline a fixed currency could give them, but the others should kick Greece out if she is going to drag the common currency down. But as to whether there should be a common currency at all, I think the UK made the right decision to stay out. It is politics and not economics that is the reason it has lasted even this long.

In the long run, staying in is best but would require a discipline the Greeks have not so far shown. I doubt they can do it, and the others won’t miss them when they’re gone, but for the Greeks overall, if they can mend their ways, they will be better for it. But since the world only gets run once, they will never know the alternative future they missed so won’t think anything positive about the result.

Onwards and downwards

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The problems caused by Keynesian theory is not that you end up with a sudden downturn, but that you squeeze the life out of the economy by a form of slow asphyxiation. If you have a job and a house, and you continue to work and live where you lived before, nothing much changes around you, other than a rise in prices and a slowdown in income after tax. You are affected but not a lot. Those in transitions, either entering the economy to work, looking for better jobs at higher pay or trying to buy a house, all these are at the pointy end. They notice, since the ability to rise up the income scale is obstructed by some invisible barrier. Things just don’t work out. Which brings me to this story: Americans Are Delaying Major Life Events Because of Money Worries. Life is getting harder so corners are being cut.

ABOUT half of American adults have postponed a major life decision in the past year for financial reasons, mainly because they lack sufficient savings or are worried about the economy, or both, a new survey finds.

The survey, conducted for the American Institute of Certified Public Accountants, found that the proportion of people delaying big decisions like buying a home or getting married had risen to 51 percent, from 31 percent in a similar survey in 2007, before the start of the financial downturn.

The change was striking, and the percentages more than doubled in some areas. Nearly a quarter said they had delayed higher education, up from 11 percent in 2007, and 18 percent said they had put off retiring, compared with 9 percent in the earlier survey. Twenty-two percent said they delayed buying a home in 2015, compared with 14 percent in 2007.

That’s the way it goes. And these are the people who might most at the front in encouraging governments to increase their spending to stimulate demand. So onwards and downwards, and no one has a clue why.

The benefits of free trade

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I am about to do a presentation on the benefits of international trade, which are similar to the benefits of domestic trade. Of course, you have to appreciate the structure and genius of an entrepreneurially-driven market economy first, which all of this is predicated on.

. an economy is an exchange economy – people sell to one another

. sellers, however, have to work out what buyers will want to buy

. not only do they have to work out what buyers will buy, they have to find a way to make sure that they buy from them and not their competitors

. that is why a market economy driven by private-sector entrepreneurs is superior in every way to any other set of arrangements

. sellers are a self-selecting process – entrepreneurs are just members of the community who decide they would like to earn an income from selling products to others

. government-selected sellers weaken an economy (crony capitalism)

. among sellers only those whose products most closely match the wishes of buyers will survive

. therefore:

. prices are kept down
. product quality is improved
. innovation is constant

. governments may contribute with some necessary regulation and will provide welfare, but have almost nothing to offer so far as product and product innovation are concerned

. this is how a domestic market economy works

. international trade is the same only across borders

. foreign sellers often produce better products at lower prices – better to buy from others than produce such things oneself

. comparative advantage explained

. domestic producers often wish to discourage imports but love exports

. will lower living standards to restrict imports

. government restrictions on imports is a very large mistake

. should not protect domestic industry since it does not protect the economy, helps out only a handful of producers and only in the short run

. once business understand that a government will never protect them from competitors who provide better goods and services, domestic competition becomes much more rigorous

. tough domestic competition is the best guarantee of international success

. but the politics are often very difficult for particular groups – such as those who produce primary products

. also many complaints about jobs going overseas – but full employment is more easily guaranteed in an open economy

. a government therefore needs sensible adjustment policies that allow resources to flow where they receive their highest return

. everyone must be made to understand that the best long-term strategy for the entire community is to allow free trade in all goods and services

. leads to higher incomes and more secure jobs

Politics, of course, gets in the way, but every decision maker generally understands all of the above very well.

The vast majority of economists are Keynesian

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I will preface this with my own invention, the National Accounting Stimulus Trap, which is built around Y=C+I+G. An increase in public spending will, inevitably, show up as an increase in Y because that is how the accounts are designed. A fall in public spending will inevitably show up as a fall in Y, for exactly the same reason. If you think that the real effects of a change in policy can ever be detected in less than a year, you have to be blind to the basics.

Which brings me to a blog post by Simon Wren-Lewis, University of Oxford, with the title, The academic consensus on the impact of austerity. The consensus is negative; most economists are either Old or New Keynesians:

Unfortunately we do not have a great deal of information on what academic economists as a whole think about austerity, but we do have two important survey results which are pretty conclusive. In the US, there is the IFM Forum, which regularly asks a group of distinguished economists – including many macroeconomists – their views on key policy issues. The last poll I have seen suggests that 82% of that panel thought the 2009 Obama stimulus had reduced unemployment, while only 2% disagreed. In the UK, the CFM survey asked a similar question to a smaller group of academic economists, most of whom are macroeconomists. Only 15% agreed that the austerity policies of the coalition government have had a positive effect on aggregate economic activity, while 66% disagreed. That consensus is not universal – it would not apply in Germany for example – but I doubt if anyone would disagree when I say that US economists call the shots as far as academic macroeconomics is concerned.

This is why economists the world over continue to teach Keynesian macro to undergraduates, and normally not as one ‘school of thought’ but rather as an initial approximation of how the economy actually works. As Amartya Sen so forcefully reminds us, the experience of the last hundred years has earned Keynesian theory this central role.

There’s more of the same:

We have another, more indirect, source of evidence. If you asked whether there was a standard model for analysing the business cycle among economists in academia and in policy making institutions, the answer would have to be the New Keynesian model. I want to include economists in central banks in particular because they have to put theories of the business cycle into practice on a regular basis. The key macromodels that central banks use to forecast and to analyse policy are Keynesian, and many are New Keynesian. [his italics]

And I have to give you this, which is a jargon-filled sentence of such raw stupidity that it amazes me that anyone can write such a nauseating sentence with such smug certitude given how anaemic the American “recovery” has been:

This is why, among economists with expertise, there is a clear majority view that fiscal austerity is significantly contractionary in a liquidity trap.

No economy that has had a stimulus applied has recovered in any interesting sense. The business cycle is cyclical. Every downturn turns up. Nothing falls forever. But if you are going to call the present pathetic example of a recovery a serious upturn, I will merely point out that you have not got a clue.

For more of the same, go here.