Monday, January 26, 2015

On Coppola on [spoiler alert]

Discussing Syriza, Frances Coppola quotes Keynes who she names only at the end of the column (although she knew and wrote that it would be easy to guess who it was).

Some snippets

Keynes on how to achieve recovery

or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money. [skip] "Thus as the prime mover in the first stage of the technique of recovery I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by Loans and not by taxing present incomes. Nothing else counts in comparison with this.
I dare to comment on Keynes.

Keynes hadn't arrived at The General Theory (1926) yet, or, at least, he hadn't arrived at Hicks (1937). In the IS-LM model, increased public spending causes increased aggregate demand even if it is financed through increased taxes. Deficit spending has a larger effect, but balanced budget spending increases have a positive multiplier (equal to 1 if the economy is in a liquidity trap).

Coppola explains "What exactly was Keynes criticising in this letter? It was FDR's National Industrial Recovery Programme: "

Coppola on Keynes and Krugman

And I'm sorry, Professor Krugman, but he doesn't have much time for arguments that deliberately raising inflation will magically restore output, either:

there is much less to be said in favour of rising prices, if they are brought about at the expense of rising output. Some debtors may be helped, but the national recovery as a whole will be retarded. Thus rising prices caused by deliberately increasing prime costs or by restricting output have a vastly inferior value to rising prices which are the natural result of an increase in the nation's purchasing power...... ......too much emphasis on the remedial value of a higher price-level as an object in itself may lead to serious misapprehension as to the part which prices can play in the technique of recovery. The stimulation of output by increasing aggregate purchasing power is the right way to get prices up; and not the other way round".
I comment

You are a bit hard on Krugman who would not advocate a National Industrial Recovery Act (I don't know of any economist who thinks it was a good bill). Increased inflation due to promised loose money in the future is quite different.

Also the data from 1933-4 tend provide some support for FDR versus Keynes round one (as the data from 1937-8 overwhelmingly support Keynes v FDR round two). Notably deflation ended and investment levels suggest expected inflation increased sharply. Many (including especially Christina Romer and often Brad DeLong) assert that this must have been due to the US going off the gold standard. But the NIRA aimed to cause this to happen, then it happened. The NIRA involved meddling with the price mechanism (indeed allowing and encouraging anti competitive practices). It is generally detested (also by me). But the few data points of evidence correspond to the hopes of those who enacted it.

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