by publius
In arguing for the stimulus bill, proponents often note that monetary policy has run its course and didn't work — thus, fiscal policy is necessary. Brad DeLong does everyone a service by explaining this argument in more detail in clear, novice-friendly language. (The post actually covers several points, but it's helpful and accessible on the monetary vs. fiscal debate). I'd be interested in getting people's thoughts on this.
I think it’s a good summary. I especially agree with his conclusion about it being good enough normally.
I’ve often said that Keynes was right for how to jump start from a depression, Friedman was right for how to control things normally, and Austrians were right about why both schools would eventually be ineffective and lead to another depression.
…Noticed I said “jump start from a depression” not prevent one.
It’s a good post, though the Keynes to Friedman story is a complex one which deserves a full-length history.
I was struck by the first comment, by Robert Waldmann:
That reminds me of Chesterton on Christianity: it hasn’t been tried and found wanting, it has been found difficult and left untried. Which is all very well, but what’s the use of a policy rule which politicians simply will not adhere to? I’m sure a country would have a stable economy if Keynes was prime minister and Friedman was leader of the opposition, or vice versa, especially if Paul Volcker was running the central bank. But real-world politicians don’t manage fiscal policy well and real-world central bankers become captive to the banking industry which, on monetarist principles, they ought to rule without fear or favour. So mistakes get made and people learn by bitter experience what previous generations already knew.
So and Obama and Pelosi are playing out a “bad cop, good cop” scenerio. Obama uses his bully pulpit skills to scare everyone and intimidate the opposition into submission; while Pelosi orchestrates handouts to the proletariat like accomplished dictatorships do to calm the masses. Now I get it. Hope it works.
I especially agree with his conclusion about it being good enough normally.
I do not. DeLong is a New Keynesian. Post-Keynesians believe that great inequalites of wealth/income are inherently destabilizing, and that Brad’s policies of monetary policy (including recent conversion to bubble popping), tighter regulation, and fiscal macro-management for recessions only will not work in the long run. See Minsky, Hyman.
It is hard for me to take seriously an article that seems to imply that fiscal policy (taxes, spending) is trivial or irrelevant to macroeconomics. Friedman wanted to make fiscal policy irrelevant by making it almost non-existent (small gov’t). It is hard for me to find any such coherent position in New Keynesian economics.
AFAICT, DeLong promotes a progressive tax system for social justice, not economic reasons.
An example is automatic stabilizers. Is their purpose counter-cyclical only, or do automatic stabilizers actually play a role in preventing recessions by maintaining effective demand? If AS’s are very important, why are New Keynesians so reliant on monetary policy? If AS’s are not important, how do NK’s justify welfare capitalism?
They don’t, so Clinton “reformed” Welfare.
Uh:
An oft-quoted investment banker e-mails us: “There is no capital in the entire global financial system. None. When I say ‘financial,’ I mean banks, hedge funds, private equity funds, homeowners and other leveraged players. There is some capital among the ‘real money’ players such as sovereign wealth funds and central banks. And the U.S. can ‘print’ some. But that’s it. … The problem with the distressed assets is not that there are no buyers. There are plenty of buyers; I speak to them every day. The problem is there are no sellers; that is, the banks won’t sell. Because to sell is to book a loss on what you have sold and what remains. And to do that is to die. That’s what it means to be insolvent.”
Yipes.
That’s what it means to be insolvent.
and it’s all Freddy and Fannie’s fault!
while Pelosi orchestrates handouts to the proletariat like accomplished dictatorships do to calm the masses
Yeah, like the peasants on Wall Street that will be raking in $2 trillion from our Communist Overlords.
Heh.
A good post by DeLong, who I think is consistently well worth reading.
One thing that deLong mentions in passing that I think deserves more attention — the “monetarists” like Friedman believe that everything is controlled by the “supply of money”. (This is the definition of monetarism) Problem is, as soon as we get an economy more complicated than trading pretty rocks, the definition of “money” starts to get slippery. Define “money” properly and you can prove just about anything.
I haven’t read any other comments yet.
I say ‘yes, agreed’ to the linked article up until where it says “Today we have reached…” 8 lines from the end. The solution is inflation/devaluation against other currencies by continuing the traditional method “Traditionally, central banks boost the money supply by buying government bonds from the Treasury for cash.” Great gobs of new cash will be put into the hands of the Treasury by this method. The treasury can use the cash to buy bonds back from the general public (read China, Japan, etc.) Obviously, the values of those bonds will fall because of the surplus of bonds and dollars. Falling bonds equal rising bond interest rates. Foreign buyers will shun US treasury obligations which will end the claimed ‘artificially low’ exchange rates visa-vis asian currencies. It’ll be a hell of a mess. Wild inflation generally wipes out the middle class. The only question is how best to use the new ‘silly dollars’ that the fed puts into the hands of the treasury. The sensible thing to do with it, is put it directly into the hands of the lower income strata through some type of reverse tax rate. The property owning classes will survive because they own tangible assets.
Or something like that. I’m sure I’ve made a few mistakes with details.
bob mcmanus:
I agree completely with you actually but I’m not aware of that being a formal school. Correct me if I’m wrong. I should have added the corollary that I think all of the main schools are inherently wrong and that the dynamics described by Minsky etc. are more accurate.
Although I also believe that in any growth economy you’re going to eventually have wealth distribution disparities and eventual collapse because it’s an exponential process instead of a logistic process. Exponential processes are inherently unmaintainable.
Although that’s an indictment not of economics as a descriptor but of our economic/monetary system so…
I should have added the corollary that I think all of the main schools are inherently wrong and that the dynamics described by Minsky etc. are more accurate.
It seems to me that the more convincing aspects of Minsky’s ideas are applicable to events on a longer time horizon than the mainstream schools of macro-econ – the latter are concerned with the weather, and what Minsky focuses on is more like long term shifts in the climate. The debt cycles which Minsky points out are cultural as much as they are economic phenomenon – they reflect multi-generational changes in attitudes towards risk taking, which necessarily reflect generational differences in how we understand the complex relationships between risk taking, rewards obtained, and hazards and costs experienced.
One of the things which bothers me most about mainstream macro-economic theory is how ahistorical it is, as if different eras are somehow interchangeable with each other and the aggregate decision making and risk taking behavior of different generations whose defining experiences have been respectively say the boom of the 1990s, the inflation of the 1970s and the depression of the 1930s are somehow fungible. This is on the face of it absurd, and yet little allowance is made for the ghosts of the past in standard theories.
It also strikes me that they do not adequately account for non-economic systems like international relations, as if our geopolitics and our economics are somehow separate and distinct systems which interact with each other only very weakly. This is a view which only makes sense if you look at history in small chunks of only a couple of decades, and regard the periods of relative calm (like the late 20th Cen., or most of the 19th Cen.) as normative and discard the turbulent periods as non-applicable. But the stormy periods have a tremendous impact on our economy – just look at what WW2 did to both the US and the global economy for example.
How can you understand economic growth in the US during the 1950s without taking into account both the widespread destruction of industrial plant and human talent in Europe and East Asia during the war on the one hand, and the large scale migration of highly educated Europeans and Asians to the safety of the US during the late 30s and 40s on the other hand. The infusion into the US economy of technical and cultural talent in the latter case had a tremendous effect, both measurably (via such metrics as patents granted, scientific publications written, Nobel prizes won, etc.) and in ways more difficult to quantify. The US benefitted by cherry picking much of the output of the educational systems funded by the preceding generation of Europeans in this manner. How does something like that not have a major effect on the economy? And yet you won’t find it factored into any macroeconomic models.
So, I signed up to refi today. Currently the ARM resets in 2011 and the current rate is 5.75% (took out the mortgage in 2004). Right now I can get a rate of 4.625% if I (i) pay a point; and (ii) pay down the principal by ~6% to get into FHA.
But what interests me is the point. The broker tells me that by paying an extra 1% of the loan amount up front, I can knock almost 1% off the interest rate on a 15 or 20 year fixed loan (i.e., one percent of the balance per year).* Under what conditions does that make sense economically?
It seems to me that banks are greatly valuing cash up front; which either means they are so desparate to increase their capital now that giving up significant interest in the future is currently irrelevant (i.e., they’re insolvent now and trying to become solvent before anyone notcies). Or they’re expecting something else (a significant drop in rates?).
Strange times.
* he tells me that this used to buy you at most most 0.25%
Ugh,
The choices you outline are not totally clear, but I think paying the point is as good an investment as you are likely to ever find.
Just consider the point as an investment, and calculate how much you save monthly, and figure the rate of return on that. It will be dramatic, and risk-free. The longer you expect to stay in your house the better it is.
BY – Yeah I think paying the point is clearly good for me, I’m just wondering about the bank. Something strange is going on for them.
Here’s a recent article on when it makes sense to pay points and why it makes more sense now for some people then it would have a few years ago.
Eric … “Yeah, like the peasants on Wall Street that will be raking in $2 trillion from our Communist Overlords.”
Cheap shots from me are expected. But silliness like this from a poster are, well, expected.
Define ‘Wall Street’. Would that include some broad brush stroke reference to those that manage just about every pension fund, 401k, retirement and nest egg in the land.
Heh, indeed.
mikkel,
I can’t remember if you’ve already posted this link or not, so just in case it hasn’t already come up yet, here’s a Minsky school writer, who IMHO writes well enough to make his ideas comprehensible and pleasant to read (stylistically speaking – obviously his conclusions are less than comforting) for the general public.
Steve Keen on modelling depressions via debt deflation theory
This thread seems to be inactive, so I may repost this at a later date.