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Saturday, May 25, 2013

on R.A. on Kinsley

At The Economists's Free Exchange R.A. joins the flash e-mob critiquing Michael Kinsley's austerian article .

update:  Hello economistsviewers.  Oddly, I wrote this post attempting to answer Krugman's question in the post which Thoma quoted at length.

R.A. (I'm pretty sure that stands for Ryan Avent) actually quotes just three sentences

I don’t think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be. And future sufferers are not necessarily different people than the past and present sinners. That’s too easy.

And discusses only the middle clause of the first "but I do believe that we have to pay for past sins".  R.A. argues that irrational exuberance and overinvestment in fiber optic cable pre 2001 or houses pre 2008 does not necessarily lead to an economy wide recession.

But that isn't even the important part of the quoted sentence.  The policy relevant claim is "and the longer we put it off, the higher the price will be."  This is what matters for the decision which faces us.  Kinsley agrees that the price can be put off (so R.A. does not respond to Kinsley at all) but thinks that implies a higher price in the future.  Kinsley did not present any argument supporting this belief.  He just asserted it.

Kinsley's assertion makes no sense.  The Treasury can borrow medium term at a negative real interest rate. If the question is paying enough to keep the national debt sustainable (and it is) the longer we put off paying price (up to 10 years from now) the lower it will be.  Interest rates might change, but the Treasury can lock in the negative real interest rate by selling 10 years TIPSs now.  Kinsley simply evokes the protestant ethic.

Also the sort of melioration that Krugman has in mind consists of resurfacing roads and replacing pipes sooner rather than later.  This is an odd form of indulgence of "dessert" to use Kinsley's analogy.  It is something unpleasant which has to be done sooner or later and Krugman thinks should be done now rather than later.  Here there is a funny one two punch of the painful being politically impossible and the pleasant striking puritans as sinful.  Stimulus can be achieved with balanced budget spending increases.  But tax increases are painful (and blocked by Republicans with more zeal than they fight say the payroll tax holiday). Only pleasant stimulus such as the payroll tax partial holidy is anywhere close to being politically possible.  But that provokes the puritans. So nothing is done about 7.5% unemployment.

To be fair to R.A. he is really responding to  Matt Klein  who tries to defend Kinsley.  Klein is responding to Felix Salmon who wrote ""the view that 'we have to pay a price for past sins' is nearly always wrong."
And thus the question of what is to be done was edited out.

But even on Salmon Klein terms, I have problems with R.A.  He discusses over investment and recessions.  He argues, sensibly, that the costs of over investment in one sector need not include reduced employment in other sectors.  But he claims that economy wide problems can be solved by printing money.  "But that's no problem ! central banks can make as much money as they want!" Why the Fed can create trillions from nothing. And did.  $600 of it with no noticible effect.  The theoretical argument that the bursting of a sectoral bubble can't cause an economy wide recession if the monetary authority prints enough money may be elegant, but it has been proven false.  US GDP remains far below potential even though banks and firms in general have plenty of money sitting around.  To be fair, the problem R.A. was discussing was a shortage of credit.  To be fairer, he was setting up a straw man rather than addressing Klein.  Anyway, he seems to have asserted that printing enough money solves all aggregate demand problems and set me off on the usual.

Too Much has been Written about Kinsley's Austerian Article, and I  wrote even more.  The article  was not worthy of attention and so it has been linked more times than I can count (I'm not technorati).  Why ?

The level of debate is lowered when we choose to counter the worst arguments for the position we oppose, but it is easy and fun.  So maybe the essay was discussed, because it is not worth discussing.  This is possible but boring.  I'd rather think it is because Kinsley has added something of value.  I think his great merit (aside from wit and intelligence) is that he is more honest than most pundits.  Kinsley is relatively willing to admit that he has opinions about austerity and that they are based on his gut not on careful analysis of data.  As noted by Krugman, this is even clearer in an earlier article on his inflation nightmare.  The belief that Kinsley is openly stating arguments which are influential but usually hidden provides partial justification for the flood of comments on Kinsley's austerian essay.  But frankly, I think it is mostly because it is easy and tempting to criticize a very bad essay, and secondarily because some people really like to criticize Kinsley.

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