The Fed Succession

[Ideologue]

I'm not saying that we should put people in camps, but if we were going to start putting people into camps, a professed belief in "hard money" would be a good category to start with.

"There are many who do not know they are fascists but will find it out when the time comes."

Ernest Hemingway, For Whom the Bell Tolls

Shows what Hemingway knows.  There are a lot of different kinds of authoritarians.

[The Minsky Moment]

Finally a pro-Summers endorsement, from Keynsian Brad Delong:
http://delong.typepad.com/sdj/2013/07/a-slight-preference-for-larry-summers-to-be-federal-reserve-chair.html

However Delong also has positive things to say about Yellen and other candidates.
And his preference for Summers might have something to do with the fact that they have collaborated on papers . . .

On a light note, while checking out the Econ blogs for Fed gossip, came across this amusing passage from Noah Smith on the limited use of gold in a systemic breakdown:

First of all, gold has always had a lot of limitations as a medium of exchange. Most notably, it is relatively easy to steal. To realize this, all you have to do is look at games like World of Warcraft, Diablo, Dungeons and Dragons, or the original Final Fantasy. In those games, gold is the money, and you often get gold not by doing an honest day's work, but by running around and beating people up and taking their gold. In other words, the entire world of modern fantasy role-playing is a subtle joke on gold's unsuitability as a medium of exchange.

I think Smith is wrong on the broader point but that made me smile.

[garbon]

Finally a pro-Summers endorsement

*sigh of relief*

[Ideologue]

No, but fed spending has increased while state spending has receded.

Additionally: the running deficit, such as it is, is in large part thanks to the collapse of the tax base during a recession, while entitlement expenditures automatically increased.  I'm not sure food stamps and UI count as a deliberate "stimulus."

Keynesian theory is not dependent on the level of spending, rather on the amount of spending that is financed by borrowing.  If the public sector were 80% of GDP (i.e., Cuba) one could still run at a surplus and be contractionary in Keynesian terms.

My point is twofold: federal borrowing did increase, but in large part to pay for necessary but desultory efforts; and that the adequacy of federal borrowing, and even federal poverty/unemployment assistance programs that have been the bigger part of that deficit spending, has been drastically undermined by the collapse of state spending.  It's been a very two steps forward, one step back approach overall.  It has clearly not been enough, which is at least partly why we're still in a recession--although as I've said there may be a structural component and I'm not fully onboard the Keynesian train here.

Joan--fwiw, you're correct as usual, but don't you think that saying the U.S. succeeded in avoiding a repeat of the Great Depression is at least somewhat damning with faint praise?

[Sheilbh]

Keynesian theory is not dependent on the level of spending, rather on the amount of spending that is financed by borrowing.  If the public sector were 80% of GDP (i.e., Cuba) one could still run at a surplus and be contractionary in Keynesian terms.

Could you unpack this for me?

Also in the US and the UK hasn't the majority of stimulus efforts been through monetary policy?

[Admiral Yi]

My point is twofold: federal borrowing did increase, but in large part to pay for necessary but desultory efforts; and that the adequacy of federal borrowing, and even federal poverty/unemployment assistance programs that have been the bigger part of that deficit spending, has been drastically undermined by the collapse of state spending.  It's been a very two steps forward, one step back approach overall.  It has clearly not been enough, which is at least partly why we're still in a recession--although as I've said there may be a structural component and I'm not fully onboard the Keynesian train here.

You keep going back to the income maintenance argument.  This has very little to do with the pump priming theory at the heart of Keynesianism.  The pump priming theory runs that government deficit spending will increase overall demand, which in turn will lead to increased business investment to meet the new demand.  Which, most would agree, has failed to happen, or at least sufficiently to bring back full employment. 

Now one could argue that several years of Greek level deficits were just not enough to prime the pump, what we need are truly Krugmanesque deficits to get the motor running again.  What that exposes is that there is a level of faith based thinking underlying the pump priming theory.  Why hasn't it worked yet?  Because it wasn't big enough.  How big does it have to be?  We'll know when we get there.  How do we know that pump priming works?  Because Keynes said so.

Obama's advisors tried to treat pump priming as a scientific principle.  Derive the fall in aggregate demand, take an estimate of the multiplier, pump enough Obamastimulus into the economy to replace lost demand.  Clunk.  Time to go back to academia.

[Admiral Yi]

Could you unpack this for me?

Ide was confusing the size of the public sector relative to the economy with the magnitude of Keynesian stimulus, i.e. the deficit relative to the economy. 

Also in the US and the UK hasn't the majority of stimulus efforts been through monetary policy?

You're comparing trillions of apples vs. trillions of oranges.

[Sheilbh]

You're comparing trillions of apples vs. trillions of oranges.

How so?

Ide was confusing the size of the public sector relative to the economy with the magnitude of Keynesian stimulus, i.e. the deficit relative to the economy. 

What's the relation of Keynesian stimulus and deficit? I don't quite understand.

You're right that Keynesianism isn't the safety net/welfare state element that's something totally different. But that's precisely the criticism that I was making of the stimulus: it should probably be bigger and it should be more focused on useful tax cuts or spending, not unemployment support or aid to the states.

Now one could argue that several years of Greek level deficits were just not enough to prime the pump, what we need are truly Krugmanesque deficits to get the motor running again.  What that exposes is that there is a level of faith based thinking underlying the pump priming theory.  Why hasn't it worked yet?  Because it wasn't big enough.  How big does it have to be?  We'll know when we get there.  How do we know that pump priming works?  Because Keynes said so.

I want a bit more on pump priming.

But it did work. The US and Germany were the countries that passed the biggest stimulus measures and they enjoyed the quickest recoveries. The UK was on that trend too, having posted some solid growth figures, until the coalition government cut all the wrong spending (like the mirror of the US stimulus). Without stimulus I think we'd have been at Great Depression levels of trouble.

[MadImmortalMan]

Joan--fwiw, you're correct as usual, but don't you think that saying the U.S. succeeded in avoiding a repeat of the Great Depression is at least somewhat damning with faint praise?

It's also too easy. It can't be proven wrong. It's like insisting god exists because nobody can prove he doesn't. It's probably true, but it's not a good argument.

[Sheilbh]

It's also too easy. It can't be proven wrong. It's like insisting god exists because nobody can prove he doesn't. It's probably true, but it's not a good argument.

Not really. It's like saying certain security policies prevent terrorist attacks, as is demonstrated by the lack of terrorist attacks. Which seems reasonable to me. The major exception is we don't always know about the plots that are prevented. We've a very good idea of the economic situation before TARP, stimulus and QE.

[The Minsky Moment]

four thoughts applicable to Yi:

1.  Keynesianism doesn't advocate running deficits all the time, only in certain circumstances.  In other circumstances it advocates running surpluses or at least balance.

2.  Related to 1, Greek fiscal policy had nothing to with Keynsianism.

3.  Merely being in deficit is not necessarily expansionary.  Cutting spending into the throat of a recession is likely to result in continuing deficits because revenues can tank faster than the budget hawks can cut.  I.e.  Osbornism in the UK is not Keynsianism.

4.  Pretty much all macro is faith based in the sense you claim.  The Lucas critique cuts in all directions.  It is extremely difficult to design and implement a proper controlled experiment to test any broad macro theory.

[The Minsky Moment]

It's also too easy. It can't be proven wrong. It's like insisting god exists because nobody can prove he doesn't. It's probably true, but it's not a good argument.

See 4 in my post above.  We can't prove it like the hard sciences but that doesn't put it at the level of theology.  There is factual evidence.  We can for example compare the results of the economies that did use stimulus against those that didn't are used less and it turns out there is good correlation.  We can also do historical comparisons.  Of course there are confounding variables, correlation is not causation, etc.  But not the same as raw ipse dixit.

[Admiral Yi]

How so?

One is dollars of money supply, the other is dollars of GDP.

What's the relation of Keynesian stimulus and deficit? I don't quite understand.

My understanding is that a Keynesian stimulus is a deficit who's stated purpose is to revive business investment.  This is clearly different from Joan's understanding, in which the move from a giant deficit to a big deficit is contractionary.  I agree that it is contractionary in the sense of income maintenance: a dollar less deficit spending means a dollar less in the pockets of consumers.  However the merely big deficit is still aggregate demand (ostensibly spurring on investment) which would not exist in the absence of the deficit.

I want a bit more on pump priming.

I don't have any more to give you.

But it did work. The US and Germany were the countries that passed the biggest stimulus measures and they enjoyed the quickest recoveries. The UK was on that trend too, having posted some solid growth figures, until the coalition government cut all the wrong spending (like the mirror of the US stimulus). Without stimulus I think we'd have been at Great Depression levels of trouble.

If it "did work" then we would be on a self-sustaining full-employment path.  What we have is not an example of successful pump priming but rather counter-cyclicle income maintenance.

[The Minsky Moment]

If it "did work" then we would be on a self-sustaining full-employment path. 

Here terminology rears its head.   There are some economists in the broad Keynsian school that might talk about self-sustaining path.   But it very concept goes against what Keynes wrote.  He rejected the concept of equilibrium  and self sustaining paths.

[Admiral Yi]

Here terminology rears its head.   There are some economists in the broad Keynsian school that might talk about self-sustaining path.   But it very concept goes against what Keynes wrote.  He rejected the concept of equilibrium  and self sustaining paths.

He didn't even mention it once in A General Equilibrium?