Tuesday, December 4, 2012

Old Posts

26 comments:

  1. Hi Tino!

    I really enjoy your writings. But I must say I'm really dissapointed by your latest critique of keynesianism, published in The American. There you sound exactly as ideology driven as Johan Norberg or Ali Esbati. What would be your response to the following quote (and blog post) by Dean Baker?

    "Brooks then decides that the stimulus did not work because the economy is not creating many jobs. Again, in the real world we would be interested in the size of the stimulus in order to determine how much impact we would expect it to have. The stimulus was scored at $787 billion. However, roughly $80 billion was a fix to the alternative minimum tax. This is done every year. Since no one ever expected to pay this tax, making this fix could not provide any stimulus to the economy. Roughly $100 billion was projected to be spent in 2011 or later, leaving $600 billion for 2009 and 2010, or $300 billion a year.

    If we want to see the net stimulus from the government sector we also have to factor in the cutbacks from the state and local governments. These came to around $150 billion a year, leaving a net stimulus from the government sector of about $150 billion annually, or a bit more than 1 percent of GDP.

    This boost from the government sector must counteract the impact of a falloff in annual construction spending (residential and non-residential) of more than $500 billion a year and a comparably sized reduction in annual consumption. In the real world, we are not surprised that $150 billion in net government stimulus cannot offset a decline of more than $1 trillion in private sector demand, but in the magical thinking of David Brooks this is a big disappointment. He notes that Harvard economist Edward Glaeser found no relationship between job creation and stimulus spending by state."

    http://www.cepr.net/index.php/blogs/beat-the-press/david-brooks-and-the-power-of-magical-thinking-at-the-nyt/#comments

    Your own take on this is very lazy:

    "Another argument, most notably made by Nobel Prize winner Paul Krugman, is that the high level of unemployment simply proves that the stimulus was too small. But by any objective measure, the fiscal stimulus was very large. Total government spending ballooned from approximately $4.5 trillion before the crisis to $5.5 trillion per year thereafter, adjusted for inflation.4

    If borrowing and spending 150 percent of GDP fails to achieve growth, why, that merely proves Japan should have borrowed and spent 300 percent of GDP!
    Total government deficit spending during the three years since the crisis was $4 trillion. This $4 trillion—not just Obama’s $0.8 trillion “Recovery and Reinvestment Act”—is the total amount of Keynesian stimulus poured into the economy. Comparing deficit spending before and after the recession, post-recession spending has been larger by about 6 percent of GDP each year.

    These are massive numbers, larger than the relative magnitude of the New Deal. If Keynesian fiscal policies have failed, it is unlikely to have been because of insufficient deficit spending."

    Why count the whole deficit as a stimulus? If there is insufficient demand, and the economy shrinks, but the government continues to spend the same amount of money as before, is this a goovernment stimulus? Are you serious? This is not in any way extra money trying to makie up for falling private demand. Keynesianism is about government trying to spend EXTRA money when the private sector is not spending enough to produce full employment.. You should know this.

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  2. “Why count the whole deficit as a stimulus? If there is insufficient demand, and the economy shrinks, but the government continues to spend the same amount of money as before, is this a goovernment stimulus? Are you serious?”

    If you had read it more carefully you would have seen that I count the INCREASE in the deficit compared to pre-crisis levels as stimulus

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  3. You mean an increase as a share of GDP? Even if the government spends the same amount of money the deficit as a share of GDP will increase if the economy shrinks. If you look at it seriously, like Baker in does above, you clearly see that the total stimulus was very small (especially when considering state level spending cuts). Please do not ignore this in your next reply.

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  4. Also: You write that 4 trillion of deficit spending is a keynesian stimulus. Of course it's not and you know this. Keynesianism is about compensating a fall in private demand with more government spending (to fill the gap). I repeat, if the government spends exactly the same amount of money while the economy shrinks (because of insufficient private demand) this will lead to a larger deficit (as a share of GDP since GDP is smaller than before). But this deficit is no extra stimulus money.

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  5. I repeat Bakers words: "This boost from the government sector must counteract the impact of a falloff in annual construction spending (residential and non-residential) of more than $500 billion a year and a comparably sized reduction in annual consumption. In the real world, we are not surprised that $150 billion in net government stimulus cannot offset a decline of more than $1 trillion in private sector demand."

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  6. Sorry for sending these last comments in three different messages. But I hope you do not ignore any of my arguments this time.

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  7. If people are interested in topics such as IQ, income and wealth, you should definitely check out the works of Heiner Rindermann.

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  8. It's just that the government did not “spend the same amount of money”. Here are the numbers, adjusted for inflation in 2012 dollars.

    2007: GDP was $15.300, total government (including state and local) spending $4.800 and the deficit was $250 billion.

    By 2009 GDP was $14.800, spending was $5.300 trillion and the deficit $1.200.

    The official “stimulus” or ARRA was one specific piece of legislation amounting to $8-900 billion. In addition many other government programs expanded, some as automatic stabilizers and others discretionary through Obama administration government growth. Moreover tax revenue was cut (again both automatically and through discretionary tax-credits ).

    You obviously can’t just count the official ARRA as Keynesian stimulus. All additional government spending and all cuts in tax revenue was also Keynesian stimulus.
    Let me illustrate this by comparing 2007:

    GDP: $15.300 billion
    Spending: $4.800 billion
    Deficit: $250 billion

    with the average of with the average of 2009-2012:
    GDP: $15.300 billion
    Spending: $5.500 billion (+700 per year)
    Deficit: $1.400 billion (+1.100 per year)

    Spending increased by around $700 billion per year, and the deficit increased by around $1.100 billion per year. In 4 years this is $4.4 trillion in cumulative deficits *in addition to the deficit we already had* poured into to the economy.

    You and your source ignore every other government program than the $8-900 billion ARRA, writing “the total stimulus was very small”. No, “the total” wasn’t very small.

    You and Dean Baker illustrate exactly the point I was making in the article, which is that you can’t just look at the ARRA and ignore the fact that during Obama spending has so far gone up by $700 billion *per year*, and deficits went up by $1.100 *per year*, mainly due to other. All of this is also Keynesian stimulus based on the standard Keynesian theory.

    Beaker is either ignorant himself or trying to deceive his readers by only citing ARRA.

    “Your own take on this is very lazy…magical thinking… … Of course it's not and you know this. …You should know this. …If you look at it seriously, like Baker in does above,”

    You don't gain anything using this kind of language, especially unless you are sure you opponent was in fact mistaken. Not giving me the benefit of the doubt using rude language otherwise just ends up polluting the discussion.

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  9. Are you unable to read? You still count the increased deficit (4,4 billion) as an extra government stimulus! The deficit increased because GDP was shrinking, not because government spending increased!

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  10. (I apologize if I insulted you, but you can't count 4.4 billion in deficit as an extra "government stimulus" since this is mostly a result of a depressed economy and the resulting fall in tax revenues, not increased government spending. It just means the government continued to spend the same as before, and maybe a little bit more, while the private sector spent much, much less than before.)

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  11. But let's just accept your numbers. Basically:

    1. Spending + 700 per year.

    This, together with lower GDP (which, among other things means lower tax revenue) leads to:

    2. Deficit + 1100 per year.

    How can you count these 1100 as extra government stimulus? Please answer this question this time.

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  12. You are confused about Keynesianism. The deficit increasing because of “depressed economy and the resulting fall in tax revenues” is also Keynesian stimulus, namely automatic stabilizers.

    http://en.wikipedia.org/wiki/Automatic_stabilizer

    Following the crash American deficits increased in part due to automatic stabilizers (simulative), the ARRA (simulative), lots of other Obama expansions of government programs (simulative) and large discretionary tax cuts (simulative).

    “The deficit increased because GDP was shrinking, not because government spending increased!”

    Real government spending went from around $4.800 per year to around $5.500 per year. How is that not an increase in spending? Don’t you know arithmetic’s?

    “But let's just accept your numbers.“

    They are not “my” numbers; they are Department of Commerce official statistics. http://www.bea.gov/iTable/index_nipa.cfm

    “How can you count these 1100 as extra government stimulus?”

    Because increases in deficits (including both automatic stabilizers and discretionary) raises aggregate demand and is the correct way of measuring the amount of fiscal policy stimulus.

    For curiosity: are you an economics undergraduate or graduate student?

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  13. Sure, I may be confused about keynesianism. But let's talk about the first part of the deficit (which is a result of falling tax revenues, and not increasing government spending). This money is not actually increasing government demand, it's just keeping government demand at the same level as before. How can this compensate for a huge fall in private demand? Please tell me how. If you're serious then this would mean that the larger fall in GDP, the larger you would call the stimulus. This would mean Greece has not done any austerity, right? You're right that above all this there was a relatively small rise in government spending. That's the extra stimulus money. Notice I always use the word "extra" to make it clear I'm refering to the additional government spending trying to compensate for the huge loss of private demand. Most of the change in spending and taxes were, as you admit yourself, automatic stabilizers that passively respond to the fall in output. That is not exactly a secret, nor did anyone expect automatic stabilizers to reverse a donwturn (as opposed to limiting its severity). If the private sector demands less, stimulus is about trying to compensate for this, not having the government spend the same as before.

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  14. (Finally, let me quote the Wikipedia link you posted:

    "The size of the government budget deficit tends to increase when a country enters a recession, which tends to keep national income higher by maintaining aggregate demand."

    Note that they write "maintain", not "increase".)

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  15. Tax revenue fell mainly because taxes as a share of potential GDP fell. According to textbook Keynesianism, tax revenue falling due to a weak economy raises net aggregate demand.

    The demand equation is based on nets. Previously taxes took (say) -4.5 trillion out of household demand, now they take -4 trillion, so you have a net +0.5 trillion household demand.


    ”This money is not actually increasing government demand”

    Sure, but households are paying less taxes which raises their demand. not all demand is “government demand”?


    “there was a relatively small rise in government spending.”

    There was a massive, historically unprecedented (in peacetime) rise in government spending. You insist it was “small” though I showed you the numbers to the contrary. It’s one thing not to have the facts; it’s another to refuse to take in data.

    “Most of the change in spending and taxes were, as you admit yourself, automatic stabilizers that passively respond to the fall in output.”

    As an empirical matter, “most” of the change in spending and taxes were not automatic stabilizers, according to CBO and others around 25%-30% were automatic stabilizers.

    http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-16-APB1.pdf
    http://www.federalreserve.gov/pubs/feds/2010/201043/201043pap.pdf

    “That is not exactly a secret”

    It was apparently a secret to you until recently: read your angry rants above.


    “nor did anyone expect automatic stabilizers to reverse a donwturn (as opposed to limiting its severity). If the private sector demands less, stimulus is about trying to compensate for this, not having the government spend the same as before.”

    You remain confused. Automatic stabilizers are not “government spend[ing] the same as before”, they are increase in net government spending due to a weaker economy without a change in policy.

    “If you're serious”

    Wherever it was you were getting your facts about fiscal policy debate, they did not do a good job, since you are misinformed. If you want to be taken “serious”, start with learning the facts, then you can better decide who to get angry at.

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  16. "Note that they write "maintain", not "increase" aggregate demand.

    Automatic stabilizers maintain aggregate demand closer to pre-shock levels by *increasing* aggregate demand. There is simply no ambiguity in Keynesianism that automatic stabilizers stimulate aggregate demand. You would know this if you would have read a macro textbook before your outburst.

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  17. Yes. But the government was taking less taxes out of private demand because private demand was lower. If the private sector buys less stuff and earns less, they pay less taxes.

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  18. Also, you still did not reply to my question how the share of those 4 billion deficit dollars which were actually spent in the same way before the crisis (in other word those dollars which were not actually an increase but just a result of falling tax revenues) is increasing demand compared to what they already did before the crisis? How? And you also did not reply to my question how they can compensate for the huge fall in private demand?

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  19. “you still did not reply to my question how the share of those 4 billion deficit dollars which were actually spent in the same way before the crisis (in other word those dollars which were not actually an increase but just a result of falling tax revenues) is increasing demand compared to what they already did before the crisis? How?”

    I already explained this, but once more. Due to a weak economy, households pay a smaller percentage of their income in taxes during recessions. 90% of the decline in real revenue from 2007 to 2009 was due to revenue as a share of GDP declining (from around 30 percent to around 27 percent of GDP). This fundamentally happens because the tax system is progressive, and because of timing of profits.

    Since households are paying a smaller share of their income in taxes, the government is taking less out of aggregate demand than it did before, which is a net-increase in aggregate demand.

    I already explained more to you than I should be required to. Your remaining questions will be answered once you read the IS-LM part of an introductory macro-textbook, which you frankly should have done before entering this discussion.


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  20. This is not a valid argument. The automatic stabilizers of the US are not designed to be one to one offsets to a loss of demand. Can you prove otherwise? There is a long and extensive literature on them - read it.

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  21. ”automatic stabilizers of the US are not designed to be one to one offsets to a loss of demand.”

    The definition of “stimulus” is not that it is a “one-to-one” offset, therefore no one has claimed automatic stabilizers are “one-to-one” offsets (which by the way would be overkill if the multiplier is greater than one).

    This discussion was about if the total size of countercyclical fiscal policy was 800 billion, which you innitially claimed, or more than 4 trillion which I pointed out. You don't even seem to have a clear idea what the size of the stimulus means.

    “read it”

    You have shown throughout this discussion that you embarrassedly ignorant about Keynesianism and at the same time impolite. I have lost patience and will not engage in further discussion. In the future if you want to comment on this blog, I hope you are less uninformed and have a better attitude.

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  22. You claim that the stimulus wasn't too small. You then count 4 trillion - of which a big share was already spent before the crisis - as extra money "poured into the economy" (your quote in the article). This is very, very dishonest since a lot if this was money already in the economy before the crisis, but now counts as part of a deficit since the government collects less taxes. You then say this is actually mostly extra money added to aggregate demand because tax share of GDP has fallen from 30 to 27 percent. But you do not show any evidence of how the private sector actors getting these lower taxes actually use the extra money they get by paying 27 percent instead of 30 percent (on their now lower income because of lower GDP) and how this money ends up increasing aggregate demand nearly enough to offset the huge fall in demand. Who gets the money, what is it spent on? Why is it enough to compensate for the fall in demand? Those are the important questions. am I not right? Maybe it does add to demand, but please show me numbers.

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  23. ”You then count 4 trillion - of which a big share was already spent before the crisis…This is very, very dishonest since a lot if this was money already in the economy before the crisis”

    The crash was in 2008, I count the increase in deficits in 2009-2012 as stimulus. How is that money already in the economy? Ellinor you are confused on these issues.

    “But you do not show any evidence of how the private sector actors getting these lower taxes actually use the extra money they get by paying 27 percent instead of 30 percent”

    I don’t have to “show” the standard Keynesianism/Hicksian result economists have relied on for 70 years that reducing tax revenue raises aggregate demand (of course people do not spend all the stimulus, which is a problem for proponents of fiscal policy). Once more, please go read a macro textbook.

    “and how this money ends up increasing aggregate demand nearly enough to offset the huge fall in demand.”

    This discussion is not about “enough to offset” (whatever that means), it’s about the size of the stimulus which you disputed. Please scroll up and read what you wrote.

    The size of the stimulus is important to establish due to the claim that if failed because it was small, rather than failing because of was inefficient. Keynesian stimulus is costly. Therefore if large stimulus fails because it is inefficient, that is a strong argument not to “fully offset” demand.

    Since you are now convinced the stimulus was indeed around 4 trillion rather than merely 800 billion, this discussion is over on my part.

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