Sunday, November 20, 2011

Austrians on Public Works and Fiscal Stimulus

I have recently seen this post by Mario Rizzo here:
Mario Rizzo, “The Infrastructure Death Rattle,” November 6, 2011.
Rizzo makes a curious comment in his opposition to Obama’s mild stimulus plan:
“The case for infrastructure spending must be made on the value of what is to be built or repaired and the efficiency with which that is done, not on the number of jobs that may be created. Frederic Bastiat made this point in the middle of the nineteenth century.”
This suggests that Rizzo is not completely opposed to the idea of public works spending, despite his criticisms.

It strikes me that two rather well known Austrian economists can be regarded as having endorsed or at least acknowledged the usefulness of fiscal stimulus and public works in a depression: Hayek and Ludwig Lachmann. Here one should always be aware of the diversity in opinion that does characterise the Austrian school, with its different strands.

Lachmann most notably had this to say about Keynesian stimulus during depression:
“Policies based on Keynesian macro-economic recipes might have succeeded (had they then been tried) in 1932 and did succeed in 1940 because it so happened that at the bottom of the Great Depression as well as during the Second World War all sectors of the economy were equally affected. In 1932 any kind of additional spending on whatever kind of goods would have had a favourable effect on incomes because there was unemployment everywhere, as well as idle capital equipment and surplus stocks of raw materials. During the war the situation was exactly the opposite, but precisely for this reason the same recipes, but with opposite sign, applied. With millions of men and women in the armed forces everything, not merely labour, was scarce and any reduction in demand anywhere welcome.” (Lachmann 1973: 50).
Lachmann’s point here is also that Keynesian polices to contract demand, the other side of fiscal stimulus, worked in the Second World War.

Hayek’s limited support for public works in severe downturns can be seen here:
“To return, however, to the specific problem of preventing what I have called the secondary depression caused by the deflation which a crisis is likely to induce. Although it is clear that such a deflation, which does no good and only harm, ought to be prevented, it is not easy to see how this can be done without producing further misdirections of labour. In general it is probably true to say that an equilibrium position will be most effectively approached if consumers’ demand is prevented from falling substantially by providing employment through public works at relatively low wages so that workers will wish to move as soon as they can to other and better paid occupations, and not by directly stimulating particular kinds of investment or similar kinds of public expenditure which will draw labour into jobs they will expect to be permanent but which must cease as the source of the expenditure dries up.” (Hayek 1978: 210–212).

“Even though there are many concerns about organizing public works ad hoc during a depression, everything speaks in favour of having public agencies perform during a depression whatever investment activities need to be carried out in any case and can possibly be postposed until then. It is the timing of these expenses that presents a problem, since funds are often extremely hard to raise in the midst of a severe depression and the accumulation of reserves in good times generally faces the objections mentioned above. There is little question that in times of general unemployment the state must intervene to mitigate genuine hardship either by disbursing unemployment compensation or, as in earlier times, by legislation to help the poor.” (Hayek 1999 [1937]: 184).
I have also pointed out before that a number of the early first and second generation Austrians were Progressive liberals and sympathetic to Fabian socialism, such as Eugen von Philippovich von Philippsberg and Friedrich von Wieser.

It is a great pity that the modern Austrian school under the spell of Mises, Rothbard and Hoppe fails to think more carefully about its own historical diversity.

BIBLIOGRAPHY

Hayek, F. A. von. 1978. New Studies in Philosophy, Politics, Economics, and the History of Ideas, Routledge & Kegan Paul, London.

Hayek, F. A. von. 1999. “The Gold Problem” (trans. G. Heinz), in S. Kresge (ed.), The Collected Works of F. A. Hayek. Volume 5. Good Money, Part 1. The New World, Routledge, London. 169–185.

Lachmann, L. M. 1973. Macro-economic Thinking and the Market Economy: An Essay on the Neglect of the Micro-Foundations and its Consequences, Institute of Economic Affairs.

27 comments:

  1. The worst part of certain pro-marketers' opposition to stimulus is that they don't appreciate the fact that private sector is not crowded out by government spending during a recession.

    Governments can only run on deficits during such periods, precisely because private savings exceed any investment made. No other household or private sector business is borrowing that money. They are, in fact, deleveraging very painfully. Somehow, some people argue that government takes away resources that would have been used by the private sector. Even when the private sector is not using it.

    The worst strawman people use against stimulus is "Government can't create wealth." *face palm* Of course government is not creating wealth. Government purchases are only a source of demand. Supply side is not a problem during recessions. The lack of demand is. Nobody is talking about nationalisation. Just about purchasing goods that have already been produced.

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  2. Quite so. Or creating the orders for goods that will lift capacity utilization higher or raise production. Or paying people who will add to the consumption component of aggregate demand.

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  3. Prateek and LK, so is a thief during a recession also not crowding out private sector? Suppose he steals other people's savings and uses them to create orders for goods that lift capacity utilization or raise production. He adds to the consumption component of aggregate demand too, doesn't he. Would you then say Madoff was a prominent Keynesian and should be applouded rather than charged with fraud?

    Or maybe the law of supply and demand does exist after all? Like that prices of goods rise as soon as you start the stealing? Or don't drop as much as if there was no stealing? Quite a sticky thought for you I guess. Just keep on stealing then, it's good for the likes of you. Some people have morality though, can you ever respect that?

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  4. Deficit spending is not theft. You're begging the question.

    "Some people have morality though, can you ever respect that? "

    Your natural rights "ethics" is only fit your idiots.

    Cheers.

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  5. @Anonymous
    To quote Cool Hand Luke, what we have here is a failure to communicate. At least on the part of stimulus advocates.

    1) Stimulus works need not come from the government. Wealthy private businessmen have spent great personal fortunes during slumps, as J P Morgan did in 1900s. (That was more of a bailout than a stimulus, but you get the point.)

    2) Nobody is raising taxes to achieve stimulus. Increased tax rates by definition is the opposite of stimulus. Herbert Hoover raised both spending and tax rates under a balanced budget, which partly aggravated a recession as people paid more to their government and received less from it. Stimulus works have involved transfers to public, not transfers from it. Anybody who talks about both raising tax rates and spending in the name of stimulus is lying or posturing.

    3) From where does the money for stimulus come? It comes from people who have already decided to save their money with the government. So much so, that in the US, they buy 10-year bonds at yields of 1.77% p.a or two times the face value in some cases. They are not investing it elsewhere. Basically, during recessions, private investors are willing to give governments free money for the next ten years.

    4) Nobody else is demanding investment either. They are all deleveraging - households and businesses alike. Government is not taking away money that wouldn't have been invested in the private sector. Few in the private sector are even demanding loans. That's why the JP Morgans and the governments are invited to use their huge borrowing power to spend on large projects that will provide work in the short term.

    How on earth does this contradict any opposition to theft? Money was never stolen. Only borrowed from willing lenders who are not even demanding immediate repayment of principal or large payment of interest.

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  6. And you can add: any secondary inflationary effects would also happen if the "stimulus" all came from voluntary private sector investment, private consumption spending or foreigners buying your exports.

    If inflationary effects per se caused by government stimulus are "theft", so would all inflationary effects caused by private sector investment and consumption spending.

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  7. Prateek and LK, let's see how your policy works:

    Year 1: money was borrowed, from willing lenders and spent.
    Year 2: money was borrowed, from willing lenders, to pay off the money borrowed in year 1, then some more money was borrowed on top of that and spent.
    Year 3: money was borrowed, from willing lenders, to pay off the money borrowed in year 2, then some more money was borrowed on top of that and spent.
    ...
    Around Year 10 or 20, maybe 30, you get Greece, Italy, Japan or US with piles of debt and recession. Japan and US can print money so a Keynesian will just keep financing his Ponzi scheme via inflation tax (outright theft, so better call it nice like quantitative easing or monetizing debt to keep it obscure). Greece and Italy can't print money so either they drop euro or end the Keynesian Ponzi scheme. We'll see.

    BTW, LK, FRB does indeed let private sector (private banks) create money, ie steal from people via inflation tax. That's the base Ponzi scheme, with Keynesian deficit spending on top of it. Theft squared. But what the hell, ignorant masses vote for that themselves, so why should you steal from them first? You are modern men, unbridled by any outdated natural laws, morality or some such.

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  8. "Year 1: money was borrowed, from willing lenders and spent.
    Year 2: money was borrowed, from willing lenders,"


    So now you admit bond purchases are voluntary? Defeated on that front, huh?

    "Around Year 10 or 20, maybe 30, you get Greece, Italy, Japan or US with piles of debt and recession"

    Rubbish. These nations have had budget surpluses too over the past 20/30 years, and debt is also paid back via taxes.

    "BTW, LK, FRB does indeed let private sector (private banks) create money, ie steal from people via inflation tax."

    (1) I never denied FRB can create fiduciary media/new money.

    (2) Any private sector activity involving investment or consumption spending can also be inflationary. Is private sector investment also immoral because it imposes an inflation tax? Obviously not: and this is the severe double standard and logical contradiction undermining your argument.

    Your objection to deficits really just boils down to a "taxes are theft!" tantrum, which I have already dealt with here:

    http://socialdemocracy21stcentury.blogspot.com/2011/05/coercion-and-taxation-is-theft-argument.html

    http://socialdemocracy21stcentury.blogspot.com/2011/05/more-on-taxation-is-theft.html

    Moreover, even large international capital account movements can be inflationary. Is that any reason for banning international capital account movements?

    (3) Your Austrian school, anti-FRB, gold standard idiocy would impose a severe deflation tax on borrowers and debtors, making them pay back much more than they borrowed, penalising them for productive investments.

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  9. BTW, Prateek, Madoff's victims were willing lenders too. There is no fraud in lending, paying-off is where it gets tricky...

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  10. Your Ponzi scheme analogy is a joke:

    http://socialdemocracy21stcentury.blogspot.com/2010/06/rolling-over-government-debt-and-debt.html

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  11. So now you admit bond purchases are voluntary?

    Yes, just like Madoff's Ponzi scheme was voluntary.

    debt is also paid back via taxes

    Right. And taxes are not theft because they're legal, government said ;) This is actually interesting. Let's consider government incentives. Sovereignty. Money monopoly. Legislation monopoly. Can you imagine worse incentives for someone who is supposed to run an economically efficient organization? (as keynesians envisage, as opposed to minarchists). Not only you can steal as much as you want, but you can even make your theft legal. I mean, why even bother with all the Ponzi schemes? Don't you have better things to do, like spending money you can print?

    Any private sector activity involving investment or consumption spending can also be inflationary

    No, how could there be price inflation if there was no money supply inflation.

    Moreover, even large international capital account movements can be inflationary.

    No, movements can merely raise some prices by lowering other prices. Actually every single purchase/sale out there does that, ie affects prices, even if marginally. I mean, you'd know that if you ever accepted basic laws of supply and demand.

    Your Austrian school, anti-FRB, gold standard idiocy would impose a severe deflation tax on borrowers and debtors

    See, you worry so much about investors and private businesses. That's nice of you, but I think they can manage without stealing from the poor. But that's just me and my Austrian School.

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  12. > Moreover, even large international
    > capital account movements can be
    > inflationary.

    No, movements can merely raise some prices by lowering other prices etc...


    I see! So international capital account movements are never inflationary, is that correct? Digging your own grave...

    "No, how could there be price inflation if there was no money supply inflation.

    (1) We have a little thing called velocity of circulation.

    (2) international capital account movements can add to a nation's money supply.

    "See, you worry so much about investors and private businesses. That's nice of you, but I think they can manage without stealing from the poor."

    LOL... So now your shift your focus to the poor? And no doubt you really *care* about the poor, don't you, what with your Austrian system that allows high involuntary unemployment, and severe depressions.

    Let me tell you something, Anonymous: the poor would benefit tremendously from Keynesian full employment, jobs with a decent wage, better labour rights, and a generous welfare state, with universal health care.

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  13. Right, a joke it is, so what you say there rolling over is not a Ponzi scheme because:

    1) government can also print money (no comment;)
    2) government pays for public infrastructure, defense and law and order (taxes no good?), pay for social services, R&D, education and charities (lower taxes with private sector no good?)
    3) government is telling us what it does with the money (yeah, you just ask any Joe about quantitative easing)
    4) government investments are so safe that they pay little interest (indeed a safe heaven Ponzi scheme for bankers, financed by 1 and 5, cool)
    5) government can also tax people (no comment;)

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  14. "1) government can also print money (no comment;), etc."

    "no comment" = admission of defeat.

    "3) government is telling us what it does with the money (yeah, you just ask any Joe about quantitative easing)"

    Ever looked at Fed's balance sheet?

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  15. So international capital account movements are never inflationary, is that correct? Digging your own grave...

    W/o FRB? Never.

    We have a little thing called velocity of circulation

    No we don't:
    http://mises.org/daily/918

    international capital account movements can add to a nation's money supply

    Interesting. So you say by bringing your dollars to Japan you increase Japan's yen supply? Where do you come off with that magic now?

    So now your shift your focus to the poor?

    I never remember it being different. Libertarians are well-off and entrepreneural, they can manage in any system, especially in keynesian one where they can steal from the poor, so why would I worry about them?

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  16. "no comment" = admission of defeat.

    I mean, come on now, are you really saying we should have allowed Madoff to print money or tax people so his scheme is no longer Ponzi??? What comment can I even make at that?

    Ever looked at Fed's balance sheet?

    No, not personally, but I've heard there are FRB discussion groups all over nation for poor people who just can't help reading Fed balance sheets over and over again.

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  17. > So international capital account
    > movements are never inflationary, is that
    > correct? Digging your own grave...

    W/o FRB? Never.


    It's clear you're a fool.

    In just a simple example, in a commodity money world, gold can flood in via a nation's capital account, and be used to bid up commodity prices. FRB is not required for such a process.

    Large gold discoveries could have the same effect.

    "> international capital account movements > can add to a nation's money supply

    Interesting. So you say by bringing your dollars to Japan you increase Japan's yen supply? Where do you come off with that magic now?


    Existing yen may well be used in the foreign exchange transactions.

    But the central bank might also create yen to exchange for dollars.

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  18. "We have a little thing called velocity of circulation

    No we don't:
    http://mises.org/daily/918


    Yeah. What an absurd article.

    Yes, Keynesians know simple quantity theory of money interpretations of inflation are flawed.

    However, that the "velocity of circulation" has no "life of its own" or has nothing to do with prices is risible.

    One empircal example: although countries with high-inflation or hyperinflation show a correlation between the growth rate of money supply and inflation, contrary to the quantity theory, that relation is not proportional. In very high inflation countries, inflation rates exceed the growth rates of the money supply, because the velocity of circulation of money increases with high inflation rates (De Grauwe, P. and Polan, M. 2005. “Is Inflation Always and Everywhere a Monetary Phenomenon?,” Scandinavian Journal of Economics 107: 239–259. p. 257).

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  19. What we call an inflation tax - the gain to the government from loss of consumer purchasing power - is very very small.

    Given that government itself must bear higher prices in the long run, any loss of purchasing power of the average worker is passed right back to the government in the form of higher wages demanded from producers and higher prices demanded by producers. As prices and wages adjust, the gain to a government from expansion of money supply can be very very small and even negative.

    Here is a link to a study on inflation tax, or as it is more popularly known, seignorage. A study from 1992 by a visiting scholar at the St. Louis Federal Reserve shows that inflation tax has even been negative in the US. Meaning that wages and prices rose much faster than government tax revenues. A strange kind of a thief is a negative thief.

    http://research.stlouisfed.org/publications/review/92/03/Seigniorage_Mar_Apr1992.pdf

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  20. gold can flood in via a nation's capital account, and be used to bid up commodity prices

    Every purchase bids up prices of something and lowers prices of everything else in relation to that thing. See, you do accept law of supply and demand after all when it suits you. Except it has nothing to do with price inflation.

    Large gold discoveries could have the same effect.

    Yes, except I thought we were talking about fiat money. I'm not against fiat money but against FRB.

    But the central bank might also create yen to exchange for dollars.

    OMG, with you it's always going in circles isn't it:

    LK: there can be price inflation w/o money supply inflation!
    me: but how?
    LK: with money printing!

    LK: deficit spending is not money printing!
    me: but how do you pay off the debt?
    LK: with money printing!

    In very high inflation countries, inflation rates exceed the growth rates of the money supply, because the velocity of circulation of money increases with high inflation rates

    How do you measure money supply? 100 methods. How do you measure price inflation? 1000 methods. But hey, let's use some arbitrary ones and see if they fit some neat mathematical equation. They don't? Booom, here's some artificial idea to make it work! Classic. That's basically what mainstream economists call science.

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  21. Prateek,

    Given that government itself must bear higher prices

    What? Government itself must bear any prices? I thought taxpayers do. Unless you mean prices of hookers in government hotels? Taxpayers too, via congressmen salaries.

    wages and prices rose much faster than government tax revenues

    So it's not stealing if your victim's salary is rising faster than what you steal. Cool, I haven't heard that one before, pure keynesian thought I must admit. Here's some more: http://www.itsnotcheatingif.com/

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  22. "So it's not stealing if your victim's salary is rising faster than what you steal. "

    (1) Tax isn't theft in the first place.
    People have no absolute right to external property. All attempts to defend such an idea fail. Consequentialism justifies taxation.

    (2) if causing inflation is "theft", practically all private sector spending is theft too. Capital acount inflows causing inflation are theft. In reality, of course inflation can be a consequence of either private sector activity or public sector activity. Either both constitute theft, or neither does.

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  23. Jan said: Austrian Schoolars are very keen to refer to such as Frederic Bastiat and J.B Say
    and often refer them self as the only true followers of just those two men.
    It´s okey but they should read them more carefully.
    Frederic Bastiat for exampel advocate a fiscal stimulus program in a depression in:
    -What Is Seen and What Is Not Seen- i qoute: "There is an article in the Constitution which states, Society assists and encourages the development of labor.... through the establishment by the state, the departments, and the municipalities, of appropriate public works to employ idle hands.As a temporary measure in a time of crisis,during a severe winter, this intervention on the part of the taxpayer could have good effects... as insurance. It adds nothing to the number of jobs nor to total wages, but it takes labor and wages from ordinary times and doles them out, at a loss it is true, in difficult times. As a permanent, general, systematic measure, it is nothing but a ruinous hoax...

    And Jean-Baptiste Say declares himself in favor of a temporary,and targeted fiscal stimulus program in a depression -in Treastise of Political Economy : "[A] benevolent administrationcan appropriately make provision for the employment of supplanted or inactive labor in the construction of works of public utility at public expense, as in construction of canals, roads, churches, or the like..."

    Well enough,it´s not surpricing since i many times seen their not very wellreaden on their own "Gurus" von Mises and Hayek etc.and more profound early thinkers as Knut Wicksell their mostly never heard of.
    But they use to pop up,here and there and parrot from pamphlets, against FRB and advocate Goldstandard etc,with i would say a sort of simplistic,evangelistic, intensity,that i feel sometimes are very tiring.

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  24. "Every purchase bids up prices of something and lowers prices of everything else in relation to that thing."

    Not even true.

    (1) Many corporations/business institutions administer prices. Prices can remain unchanged for long periods of time, despite changes in demand.

    (2) in environemnts of idle resources and low capacity utilization, surges in demand primarily cause rises in production and employment. Inflation might not even happen.

    (3) (1) and (2) apply equally to government spending as well as private spending. You can assert the same about government spending: "state purchases might just bid up prices of something and lower prices of everything else in relation to that thing."

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  25. "Every purchase bids up prices of something and lowers prices of everything else in relation to that thing."

    Not even true.

    False. That is true. It follows from the law of excluded middle. If you buy something, you must abstain from buying other things. That means higher demand for the thing in question, and lower demand for other things. That's how the price system works. It's why economic competition leads to some firms earning more profits than other firms.

    (1) Many corporations/business institutions administer prices. Prices can remain unchanged for long periods of time, despite changes in demand.

    Irrelevant. That the prices of some things go unchanged for a period of time does not refute what Anonymous said. If prices go unchanged from one point in time to another, and assuming constant supply, then this means that demand was higher there, and therefore lower elsewhere. You can't spend the same dollar in more than two places at the same time. If the prices remain unchanged for something, then it means the demand for those things came at the expense of demand for other things. It means that other things have prices that are lower than they otherwise would be.

    And firms that "administer" prices do so in order to not incur losses relative to costs of production. They are still subject to market forces. This is not a detriment of the market. It is only a detriment to those who believe restaurants should change their prices to every single change in demand for their food, which is absurd.

    (2) in environemnts of idle resources and low capacity utilization, surges in demand primarily cause rises in production and employment. Inflation might not even happen.

    It's not necessary that rising prices from one time to the next occur. Printing and spending money raises prices from where they otherwise would have been. The relevant comparison is the counterfactual of no inflation, not the economy of the past which is a function of past knowledge and past actions.

    (3) (1) and (2) apply equally to government spending as well as private spending. You can assert the same about government spending: "state purchases might just bid up prices of something and lower prices of everything else in relation to that thing."

    True, which is exactly why government spending hampers recovery if recovery requires lower relative prices consistent with true consumer relative marginal wants.

    None of the 3 points you made refute the truth that "Every purchase bids up prices of something and lowers prices of everything else in relation to that thing."

    This argument is a logically necessary argument. You can't spend the same money on two different things. If you buy one thing, you add to the demand and hence prices of some goods from where it otherwise would have been, and reduce the demand for and hence prices of other goods from where they otherwise would have been.

    Of course, large companies will probably not change their prices on the basis of a single individual buying one thing instead of another for say $100. But large companies market to large numbers of people, so the relevant demands are the demands of the market.

    The tendency is for prices to change, even if prices don't change in the short run. If the demand changes are large enough, then there will probably be a shorter term change in prices. With smaller changes in demand, the changes in prices are more gradual.

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  26. "It's not necessary that rising prices from one time to the next occur. Printing and spending money raises prices from where they otherwise would have been. The relevant comparison is the counterfactual of no inflation, not the economy of the past which is a function of past knowledge and past actions."

    Since the example I gave assumes no inflation,owing to idle resources and low capacity utilization (a situation you haven't refuted in any sense), this is gibberish.

    "None of the 3 points you made refute the truth that "Every purchase bids up prices of something and lowers prices of everything else in relation to that thing."

    This argument is a logically necessary argument."


    It is absurd argument of theworst form of Austrian a priori idiocy.

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  27. "It is absurd argument of the worst form of Austrian a priori idiocy." Right, LK,i agree.
    Here is one that follow the same road. http://www.youtube.com/watch?v=wgF-n-9VxpM&feature=related

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