Wednesday, August 31, 2016

Sims, Krugman,and DeLong

Paul Krugman is dismayed by something Christopher Sims said a Jackson Hole

Sims said

Fiscal expansion can replace ineffective monetary policy at the zero lower bound, but fiscal expansion is not the same thing as deficit finance. It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as fi- nanced by future inflation, not future taxes or spending cuts.

I promise that my immediate thought when I read the Sims quote somewhere else yesterday is that another effective fiscal stimulus would be increased government consumption whether financed by future spending cuts, future taxes or even current taxes with no increase in the deficit ever.

I sense the long term damage done by Milton Friedman's rhetorical brilliance. Friedman somehow managed to redefine Keynesian stimulus as temporary tax cuts and not as temporary deficit financed spending increases (which is you know (at least I hope you know) the policy that Keynes actually advocated).

Sims makes it fairly clear that he is not considering spending increases. I don't know why. The statement "fiscal expansion ... requires deficits" is false for all existing macroeconomic models and makes no sense *unless* fiscal is interpreted to mean "based on taxes alone for given government spending".

DeLong is in the title for two reasons. First he remarked somewhere on the amazing success of Friedman's rhetorical trick (one among his many completely brilliant, unscrupulous and successful triks: others are saying that keeping the growth of the money supply constant via constant monetoriing and intervention is laissez faire, saying the Fed caused the great depression because he thinks the Fed could have countered the private sector crisis (as it tried to do in 2008 so the current evidence is that the Fed could have made the great depression a great recession), and pretending that prominent Keynesians claimed that the expectations unaugmented Phillips curve was stable). Second, he regularly has the effect on me that Sims had on Krugman when he writes things to the effect that *THE* solution to inadequate aggregate demand in a liquidity trap is to increase the supply of safe assets. I try to always comment that balanced budget fiscal expansion would also work without any increase in the supply of any assets. He always agrees until the next time he writes that.

There is something strange going on there in Berkeley & Jackson Hole . I am at least as confused as Paul Krugman (as is usual).

update: There is a third reason to put Brad in the title. He wrote this post before I did, then added an interesting post with a model and all that. He usefully adds that Sims might also have considered a model in which there is government spending but GDP is defined as GDP-G, that is there is no fiscal stimulus do to increased spending if the multiplier is 1. It is indeed true that a lot of Ricardianoid arguments are based on the equation 1=0 in which "multiplier effects" mean a multiplier greater than 0 if one is discussing optimal policy and a multiplier greater than one if one is discussing the evidence. I hit post and *then* surfed over to Brad's blog (usually a mistake).

4 comments:

Blissex said...

«he writes things to the effect that *THE* solution to inadequate aggregate demand in a liquidity trap is to increase the supply of safe assets.»

Which seems to involve something like swapping at "friends of friends" prices the "impaired" assets held by financial corporates with safe assets, and pushing up asset prices in general, courtesy of the Fed; the famous "wealth effect" strategy.

«I try to always comment that balanced budget fiscal expansion would also work without any increase in the supply of any assets.»

My usual comment is much the same: that during a recession the obvious shortage is that of the "safe assets" called "jobs" that pay an interest rate called "wages". As JM Keynes said, the principal problem of a recession is low demand because of unemployment.

I often remark that many on the "sell-side" advocate the expansionary impulse of the "wealth effect", but they somehow ignore the "income effect" of giving jobs to the unemployed.

«He always agrees until the next time he writes that.»

Same here, but I am not at all surprised that he goes back to advocating one way or another the rebuilding of the balance sheet of big bankrupt speculating corporates.

I guess that when BdL writes «as a card-carrying neoliberal and as a proud member of the Rubinite wing of the Democratic Party» some people don't believe him :-).

Given that BdL's writings have many interesting qualities it may be easy to forgive his allegiance, but it should not be forgotten.

Robert said...

You equate "Rubinite" with "pro-banker", Brad does not. He considers Rubin an egalitarian advocate of higher taxes on the rich and transfers to the non rich. It is perfectly fine to disagree with Brad about Rubin, but you have to understand what he means by Rubinite. It isn't what Taibbi means.

In any case, Brad is certainly a strong supporter of redistribution from the rich and he dreams of a day when unions are strong again (knowing no better than I or anyone how to achieve it).

I am confident that Brad's safe asset shortage obsession clearly came with excitement over the discovery that J.S. Mill in 1828 understood macro much better than R Lucas and E Prescott in 2008 (or 2016).

Blissex said...

«equate "Rubinite" with "pro-banker"»

Not quite, I think "Rubinite" means "trickle down". After all the signature policy of Rubin was higher taxes to create space for interest rate reduction and thus zooming asset prices. The higher taxes also gave a congressional elections win to N Gingrich...

«Rubin an egalitarian advocate of higher taxes on the rich and transfers to the non rich»

That's the Democratic minority wing of the Democratic party, not the Rubinite wing. But I concede the Rubinite wing is less extreme than most neoliberal factions and cares more about a broader base of prosperity.

«Brad is certainly a strong supporter of redistribution from the rich»

Sure he is: he has been consistently advocating redistribution from the lazy, overpaid, rich working class of first-world countries like the USA to the desperately poor underclasses of Mexico and other developing countries, arguing that giving USA jobs to immigrants and offshoring them to third world countries has been a strategy by USA politicians to gain the gratitude of third world country voters in 50 years time.

«and he dreams of a day when unions are strong again»

And here we go again. He talks about that, but all his policy proposals are for bigger asset prices and trickle down, which is the topic of your post.

I could quote BdL many times on that, but the highest moment of his trickle-down policy advocacy was:

www.bradford-delong.com/2015/06/bubbles-and-leverage-highlighted.html
«But I find it interesting that back in 1936 Keynes went to a fourth position: what we used to call the "Greenspan put", and perhaps should have called the "Keynes put"--to use monetary policy to validate whatever levels nominal asset prices, at least, reach during the bubble.»

That is a great traduction of Keynes' thought, as he was always referring to "validating" the *employment* level of full employment, not the financial asset valuations reached during a bubble.

When Keynes was writing of a "permanent semi-boom" he meant a permanent employment semi-boom, not a permanent asset valuation one, because his emphasis was always that "effective demand" was trickle up from employed workers, not "trickle down" from richer property rentiers.

Finally, I think DeLong often fails to recognize the difference between a *partial* supply glut, and a *general* supply glut, and so do most Economists.

«Brad's safe asset shortage obsession clearly came with excitement over the discovery that J.S. Mill in 1828 understood macro much better than R Lucas and E Prescott in 2008 (or 2016).»

S Wren-Lewis recently wrote in his blog very excellently of the New Classical "revolution" that «nothing that was not in the New Classical tradition created before (or even after) this revolution is deemed to exist». It is very sad.

But for people formed in non-USA traditions, like studies of political economy in most european countries, continuity has not been broken; for example so-called MMT is nothing new to those who have studied political economy outside the USA, a country where studies of history of economic thought and even economic history have been severely downsized (like other anglo-american culture countries).

Some time ago I ended up on a web page with the list of footnotes of chapter 25 of "The Capital" and just those footnotes written so long ago contain more insights in political economy than the whole work of cheerful intellectual fraudsters like M Friedman.

Blissex said...

Overall obviously I don't know why BdL is consistently advocating neoliberal policies of bigger asset prices, bailing out big speculators when asset prices crash, and more immigration and offshoring of USA jobs.

My optimistic guess is that he think that there is no voter majority in the USA for keynesian and labour friendly politics, and that "trickle down" is regrettably "second best", so as "second best" he endorses the enlightened self interest of financial rentiers like Rubin and their supporters like Summers.

I think that is an interesting quote about current politics by BdL:

«As I see it, back in the 1960s, 1970s, and 1980s the spinmasters for Goldwater, Nixon, and Reagan rooted the Republican Party in three beliefs:
1. the government is not on your side–the government is on the side of the Negroes
2. tax cuts always raise revenues
3. the people outside our borders (and the people inside our borders who came from outside our borders) are not our friends»

I tend to agree, and also those are the beliefs of thje majority of middle class voters in the USA. Then I see the argument that since the lower classes don't vote the only feasible policy is permanent asset price bubbles for "wealth effect" leading to "trickle down", but I don't agree with it, because it is backwards.