In which I agree with Megan McArdle (crosspost from Crooked Timber)

For quite a while, I’ve been arguing that the simultaneous occurrence of sustained depression in most developed countries provides fairly conclusive evidence that both new classical macroeconomics and standard versions of real business cycle theory cannot explain actual macroeconomic outcomes. That argument is directed both against US-based economists like Casey Mulligan and Narayana Kocherlakota, who are trying to explain the US experience in terms of problems specific to the US labor market[1] and to European advocates of austerity who blame the crisis in peripheral European countries on (mostly falsely) alleged government profligacy in those countries.

An immediate implication, drawn out here by Paul Krugman, is that the success or otherwise of the limited stimulus undertaken by the Obama Administration should be assessed by comparison to the performance of other countries, most of which undertook less stimulus, returned to austerity faster, and have experienced correspondingly weaker growth (as some Oz tweeps are pointing out, he might have mentioned Australia, which undertook a big stimulus and avoided recession altogether).

But, as Megan McArdle snarks here, there’s an implication more appealing to Republicans. If Obama can’t be blamed for a global recession, neither can Bush. Although McArdle’s argument isn’t watertight (the US is big enough that US actions have a big effect on the world as a whole), the conclusion is broadly correct. There’s plenty of blame to go around for the Global Financial Crisis and the subsequent depression, and the Bush Administration deserves only a small share. Bush’s main contribution was to introduce unfunded tax cuts at a time when the budget should have been in surplus, thereby reducing the fiscal space available for stimulus when the crisis came. But, given the weakness of the stimulus and the ferocity of the political response, it’s not clear that was a binding constraint in any case.

The primary culprit is market liberal economics, which may be considered both as a set of ideas with its own internal logic and as an expression of the class interests of those who benefit from the finance-dominated form of capitalism that produced the crisis and has prevented any recovery. My book Zombie Economics is a critique of market liberalism considered as an economic theory, showing how market liberalism produced the crisis. Colin Crouch’s Strange Non-Death of NeoLiberalism gives more of the class interpretation, explainign why these discredited ideas remain dominant.

20 thoughts on “In which I agree with Megan McArdle (crosspost from Crooked Timber)

  1. I don’t see the problem here. I’m sure that macro economics can explain and quantify each influence in the last ten years, but explain and qantify the amalgamation of all of those forces is another level altogether.

    The types of forces at work were:

    Steadily increasing population and expectation of a better life. Global cell phone access. Global internet access.

    Emerging economies of China, India and Brazil, 2.6 billion people, all focussing their cheap labor at Europe and the US providing a steady drain of economic opportunities for the blue collar trades. Simultaneously some European countries, the US and Australia entered a property boom which also triggered a building boom. This transition to construction economies had the effect of masking the steady loss of fundamental manufacturing employment.

    The Iraq war providing a huge sink hole for war hardware. For the US this amounted to exporting manufactured assets and services to another country, and not being paid. This was the equivalent of Australia exporting coal and iron ore to China but never receiving any payment. How many years could Australia keep that up before recession set in.

    Banking dereglation and global free trade.

    The last time that oil was $20 a barrel was around 1998. The Iraq war set of oil supply concerns and oil began a steady upward trajectory. Along the way Oil Producing States became awash with surplus money from the increased revenues above static costs. This money fuelled the building boom further and drew people into debit spending. Steadily rising property prices soaked up much of the steadily increasing lake of oil surplus funds. Oil speculation fanned the flames of the boom even further right up to the oil price crash ($170 down to $70, FM).

    It became evident that the US was not going to achieve the anticipated river of oil from Iraq as was anticipated and the Iraq situation long term steady drain on US govt funds. This was the basis of Donald Trump’s infamous declaration that “….that is our oil over there (Iraq) we should just go there and take it!”

    Somewhere along the line the Wall Street geniusses attempted to keep the massive amounts of money flowing that they had experienced in the oil ballon, and found a vehicle in a “Bottom of the Harbour” like mortgage equity investment repackaging exercise which they sold to less skilled investment bodies fat with baby boomer retirement funds.

    The property boom weakened with the lower oil price providing less money into the machine although the lower energy price provided momentary economic relief, but the damage was already done.

    Someone somewhere saw the fly in the derivatives ointment and pulled back, and the whole thing began to unravel.

    That is how I see it.

    What we have had is and extended and intertwined economic process that no one theory can exaplain as a formulaic algorithm. This can only be appreciated iteratively.

  2. Some people look forward to recessions. Gives them a new chance to moan about capitalism and the class interests it supposedly serves.

    Mentions of the dark influences of the Chicago school just show your age. Are any of them who are still alive under 80? Coase is 101 (and still publishing books! May we all.)

    Stigler contended that economists exert a minor and scarcely detectable influence on the societies in which they live. Stigler in the mid 1970s toasted Milton Friedman at a dinner in his honour “Milton, if you hadn’t been born, it wouldn’t have made any difference.”

    Stigler argued that if Richard Cobden had spoken only Yiddish, and with a stammer, and had Robert Peel had been a narrow, stupid man, England would have repealed the corn laws to allow free trade in grain as its agricultural classes declined and its manufacturing and commercial classes grew in the 1840s,

    As Stigler frequently noted,
    • the ideas behind reform had been around for a long time.
    • To affect public policy, ideas must find a market among the groups influencing change.
    • when their day comes, economists seem to be leaders of public opinion.
    • But when the views of economists are not so congenial to the current requirements of interest groups and median voter, these same economists are left to be the writers of letters to the editor in provincial newspapers. These days they would run an angry blog.

    Can you think of any significant public expenditure programmes, regulation, subsidy or welfare benefit that is not supported by the median voter? Interest groups fight for scraps from the median voter’s table in comparison.

  3. The smartest things about the Aus response to the GFC was that the stimulus was directed at poor people who would actually spend the money in Aus. The other smart thing was that it came as a one off payment so that it didn’t have to continue once the need for stimulus was over.

  4. Would “market liberal economics,” be a problem if:

    all producers were non-profit cooperatives and

    demand was not inflated through any form of debt and credit (or lay-bys)?

  5. I had thought that the compounding effects of taxcuts plus WOT had diminished the projected surplus to the point of inconsequence. The stimulus, even though small by comparison, plus the fall in receipts pushed the govt into deficit.

  6. @John D Most Americans are unaware of how Australia coped. I was on a trip couple of years ago and when the subject came up and I briefly filled them in the response was invariably “they did WHAT..WOW”!

  7. Also, Bush taxcuts plus WOT (incl Iraq and Afghanistan) plus other spending increases started in 2001 while TARP etc started ~2008.

  8. Bush’s contribution to the GFC and Bush’s contribution to recovery are two different questions.

    Bush’s contribution to causing the crisis was pro-cyclical deficit expenditure. This was a measurable cause of the asset bubbles of the mid-2000s. It is debatable whether a balanced federal budget would have prevented the collapse of some major financial institutions in 2008.

    Bush’s contribution to recovery is more interesting. His administration underwrote and nationalised some major financial institutions. Should this program be regarded as the first steps towards recovery or further steps towards deepening the crisis? I admit I am torn on the answer to this question.

  9. Although I don’t agree with the RBC crowd, I don’t think you can dismiss them that easily; they would argue that the international dimension to the GFC is caused by the correlations between productivity shocks between nations (and maybe terms of trade movements).

    Now I think that productivity shocks are pretty important for the macroeconomy, I just think they are non-stationary. The stationary component to total factor productivity is caused by cyclical variations in factor utilization, so of course it is highly correlated with cyclical movements in consumption and investment.

    The non-stationary movements in TFP do the reverse; they cause movements in consumption and investment that are also non-stationary. However, the RBC crowd completely miss this effect when they apply a Hoderick-Prescott filter to their data.

  10. If monetary policy was efficient, as it apparently was in the Menzies era, what shocks are left to cause most post-war business cycle fluctuations before the 1970s except fiscal, tax and other productivity shocks? Were the oil price hikes in the 1970s a productivity shock?

    • Were the regulatory changes from the late 1990s onwards that changed the nature and stability of financial intermediation for the worse a productivity shock? If explicit and implicit deposit insurance is a Kareken and Wallace style productivity shock to bank risk-taking and the risk of bank runs, financial regulation changes are productivity shocks?

    • Was the purported 2008 temporary collapse of financial intermediation and destruction of bank information capital about the costs and individual risks of intermediating borrowing and lending after a Bryant-Diamond-Dybvig style panic driven bank run (or a shadow bank run) in 2008 a productivity shock?

    • Is Bryant-Diamond-Dybvig deposit insurance a positive productivity shock?

    p.s. in 2008, the Australian government announced emergency bank deposit insurance guarantees. In Bryant-Diamond-Dybvig style bank panics, these guarantees ward off the bank run and thus cost nothing fiscally because the deposit insurance is not called upon. The guarantees and lender of last resort were the key stabilising measures?

    Rudd’s fiscal policy was destabilising. It forswore tax smoothing for random changes to the timing of taxes and unpleasant monetary arithmetic. The Kareken and Wallace model of bank runs and deposit insurance is the better explanation of 2008 GFC.

  11. Yes, McArdle was right in the sense that you can not blame presidents that just followed the trend which was going on since 1968. Same for Australia and more or less most European nations.
    The trend is Surplus circulation is preassured to the breaking point. As Yanis Yaroufakis calls it Surplus Circulation of money and trade from rich to poor and back, weather involving nations or states in federation or people. It is about circulating the wealth trough the economies. If circulation is accumulated in one place, the rich, the economy halters.
    In 1968 two things happened that caused this, Acctually first one was used as an excuse for other to happen.
    First thing is that US as a major organizer of Surplus Circulation between the nations stoped being exporter of things or Surplus exporter or money importer which was enabled by Marshall plan which was a pure giveaway of US dollars to the world and taking it back trough exports. In 1968 US started importing more then exporting and hence had to switch the Surplus Circulation flow which kept it going. So the US is a major mover in world economy due to the size of it. With the crisis hiting USA in 2008 Surplus Circulation reduced by 30% by Yanis’s calculations;
    US also has internal Surplus Circulation within states that is ongoing between surplus and deficit states.
    EU crisis is caused by interupting Surplus Circulation between surplus and deficit countries within eurozone when Merkel decided that every country has to take care of their own banks that needed capital infusions which started sovereign bond crisis. The risk of default prevented further Surplus Circulation from surplus countries to deficit countries that is requierd and normal in all stable federations, regions, cities, and people.
    Yes, even the regions within every state has Surplus Circulation, even the cities have ongoing Surplus Circulation between surplus and deficit quorters, and hauseholds have ongoing Surplus Circulation between parents and kids.
    Yes, Surplus Circulation must be ongoing in normal, friendly times, but are interupted in times of crises when emotions and fear switch to animosity and blaming each other.
    In 1968 also the Surplus Circulation between rich and poor in the USA was interupted by stalling the rise of the workers income and switching it to menagement. The leveled income was counteracted with easing up on credit conditions which enabled ever more higher consumer debt which kept Surplus Circulation going up untill 2007 when large US banks who also had Surplus Circulation between them realized the size of trouble, whether real or nominal stoped such weakening of credit conditions.
    In Aus there was no such bankers panic, or it was prevented with fiscal stimulus, hence private debt rise is not reversed, hence Surplus Circulation is still ongoing.
    High marginal tax rates kept workers income grow with productivity growth, when high marginal taxes were reduced it enbled managers to take the productivity growth for themselves.
    High marginal tax rates were reduced when Communist Party of USA and unions were attacked and weakened, by McCarthy process and reformation of Democratic party after Civil Rights Act of ’64.
    New entrants to labor market from women and blacks were only contributing to power of management to take more of the productivity growth for themselves.
    This construction comes from combining the writings of Yanis Yaroufakis, Richard Reich and Richard Wolf.
    It is the Surplus Circulation trends that were the cause of the GFC not so much presidents that just followed it. Reagan and Thacher were just first that realized the ongoing switch in the trend and reinforced it and therefore only speeding it up. Following presidents did not do anything to change the trend, and only in that sense you can blame them.
    The key to succesfull ongoing Surplus Circulation between the people is high marginal tax rate.
    Or as Chris Warren sugested, non profit cooperatives which also keep managers from taking the surplus of productivity growth for themselves in extreme proportions.

  12. @John Quiggin

    Professor Quiggin, I have just read Krugman today who is increasing sounding like a MMTer:

    From your replies for some of the comments in Crooked Timber Thread and previous posts I realise that you do think there is a binding constraint on government spending(?) I am currently evaluating MMT and since this is one of the major assumptions that government do not have any financial constraint as long as it has its own fiat currency and the debts are denominated in its own currency; can you explain why you believe this is not the case (other than legal issues such as the Maastricht Treaty etc.)?

  13. @Tom
    MMT does claim that there is no financial constraints as long as it has its own fiat currency and the debts are in its own currency.
    But there are political constraints such as Maastricht Treaty, or laws that prevent US Treasury to print paper or digital money, but is allowing the FED to do it.
    And there are resource constraints, like availability of energy and unemployed labor. This notice of resource constraint is what almost everyone criticising MMT miss. Once resource constraints became effective then the previous policy of printing money has to change or it will cause higher and higher inflation. MMT is preffering raising taxes as a policy for blocking inflation.

  14. @Jordan

    Considering your post above, there is nothing new about MMT, relative to a Keynesian macro textbook model.

    IMHO, ‘the economy’ cannot be adequately represented by macro-economic models.

  15. @Jordan

    Yes, I’m aware and to be honest agreed to that there is no financial constraints by government spending as claimed by MMT. As to the constraints, MMT argues that it depends on resource of the economy and the aggregate demand not exceeding production capacity of the economy being the only ‘economic constraints’ other than legal and political constraints.

    I don’t really see how it differs to Keynesian economics, but since Ernestine Gross and Professor Quiggin seems to disagree with MMT (maybe not exactly on the issue of government financial constraint), I just hope they can share why.

    P.S. I don’t agree with MMTers all the time but their model on government finance and bank lending seems more realistic than other ‘official models’ (that includes Neo and New Keynesian) at the moment.

  16. 12 months ago Prof Quiggin preferred MMT discussions to be in the sandpit as he doesn’t believe the issues he has with it were clarified. I’ve been awaiting a new sandpit in hope of having a discussion. My will on that front is fading.

    However, I would point out there is a difference between what Samuelson says on Keynes and what Tarshis says on Keynes. I will also agree that what Keynes originally said is often overlooked/misinterpreted in the current models.

    I will say much of MMT incorporates old Keynesiansim but that is not all it does. It brings in things like credit money, endogenous money, functional finance, etc.

  17. @Senexx

    “I will say much of MMT incorporates old Keynesiansim but that is not all it does. It brings in things like credit money, endogenous money, functional finance, etc.”

    In my opinion, being ‘an old Keynesian’ whether if an economist proclaims him or herself to be be Post, Neo, New Keynesian or MMTer, he/she can be classified as ‘an old Keynesian’ as long as he/she always analysis the economy under the basis of observations of the economic behaviours of the current economy as human psychology changes from time to time.

    To give an extreme example, if everyone in an economy really goes out and spend and businesses starts borrowing and hiring people for expansion instead of deleveraging, as soon as the government annouce that they are going to cut the deficit in a deep recession, then the economy can in fact recover (as any reasonable person knows prior or from the result of austerity this is not psychological behavior in the current world).

    Lucas should go and critise the economists of his own school (and himself of course) for failing his own Critique.

  18. Ernestine Gross
    I think i did not claim otherwise then you.
    And i agree with Senexx’s comment. MMT uses Keynesian models with a slightly different interpretation given the changes and developement of Keyenes writings trough time and also the changes of conditions on the ground such as rejection of gold standard in international dealings. Having a world gold standard ensured all currencies were practically pegged to dollar which has huge implications.
    I can see that there is a lot of semantic dissagreements on theories, but real difference is point of view, not analysis. MMT is POV of money as it moves trough the economy while New Keynesians POV is of elements of the economy (mostly government), but both wants the same; prosperity for all as equally as possible.

  19. nry Louis Mencken.|”The only joy in the world is to begin.” by Cesare Pavese.|”Thought is the labour of the intellect, reverie is its pleasure.” by Victor Hugo.|”The highest result of education is tolerance.” by Hellen Keller.|”To teach is to learn twice.” by Jeseph Joubert.|”Ambition is a poor excuse for not having sense enough to be lazy.” by Charlie McCarthy.|”Perhaps even these things, one day, will be pleasing to remember.” by Virgil.|”It is better to ask some of the questions than to know all the answers.” by James Grover Thurber.|”Sooner or later, those who win are those who think they can.” by Richard Bach.|”The quickest way of ending a war is to lose it.” by George Orwell.|”In doing something, do it with love or never do it at all.” by Mohandas Karamchand Gandh

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