One aspect of this interview that, I suspect, will soon be distorted by the right and libertarians in general is the exchange from 2.44–3.31.
It perfectly obvious that the exchange in which Krugman talks about space aliens is nothing but comedy, facetious remarks:
Bill Maher: So we need another Hitler? [laughs].The whole point of Krugman’s remarks is precisely that he wants spending on public infrastructure and social programs (“bridges and roads and healthcare clinics and schools”), and his comments on alien invasions are an attempt at a joke, which elicits laughs from the audience, as it was supposed to.
Krugman: I have actually suggested ...
Bill Maher: I am getting wrong?
Krugman: since it is hard to get people to do ... much better, obviously, to build bridges and roads and healthcare clinics and schools. But my proposed ... I actually have a serious proposal, which is that we have to get a bunch of scientists to tell us that we’re facing a threatened alien invasion, and in order to be prepared for that alien invasion, we have to do things like build highspeed rail. and .. and you know [laughs] ... And then once we’ve recovered, we can say, “Look, there were no aliens.” But look, I mean, whatever it takes because right now we need somebody to spend, and that somebody has to be the US government.
I have no doubt that we can now just sit back and watch as the libertarian and Austrian blockheads come out and distort these comments, and proclaim that Krugman is actually calling for a fake alien invasion.
Already we have an inkling of how they will treat it here.
It seems like you are worried that that the right will ignore what Krugman would really like do:
ReplyDelete"much better, obviously, to build bridges and roads and healthcare clinics and schools"
and focus on what would not be his favored option but which he still think would help:
"I actually have a serious proposal, which is that we have to get a bunch of scientists to tell us that we’re facing a threatened alien invasion, and in order to be prepared for that alien invasion, we have to do things like build highspeed rail".
But both proposals are equally absurd from a non-Keynsian perspective. The logic seems to be: activity is depressed so lets just get the state to step in and directly invest in whatever projects we can find that are going to be politically acceptably. It doesn't matter that these projects will take away resources from ventures that are already serving consumers revealed preference - all that matters is that they will also employ some currently unemployed resources.
There are market-oriented New Keynsians out there who share Krugman's belief there is a need for stimulus to boost AD but recognize the need for these to be as market-neutral as possible (they propose things like pay-roll tax cuts).
Why do "big-government" Keynsians like Krugman always propose these kind of headline grabbing, market-distorting solutions ? One suspects its as much politics as economics. They believe in a "mixed economy" but the proposals to change the mix always seems to be in one direction.
"It doesn't matter that these projects will take away resources from ventures that are already serving consumers revealed preference "
ReplyDeleteAmerica has mass unemployment, idle capital goods, idle resources, and many nations willing and ready to ship goods.
Tell me another joke.
So you really don't think it matters if we take resources away from existing business as long as the end result is higher overall resource utilization ? Even if there were alternatives that boosted AD without distorting the market?
ReplyDeleteI rest my case.
You misunderstand: the very idea that government stimulus will prevent the private sector from getting resources in this type of slack economy, and when the rest of the world is ready and willing to ship real goods to America, is itself the height of idiocy.
ReplyDeleteSo in your view here is what happens:
ReplyDelete- the govt builds lots of "build bridges and roads and healthcare clinics and schools"
- this may draw some resources (engineers and doctors etc) away from where they are currently employed but is not important because there will be other resources currently lying idle that can be used instead.
It seems that in this model the thing that really matter is that Y will be increased by increasing G and with this increased Y will reduce unemployment and (presumably amongst other things) Americans will be able to buy all those goods that "the world is ready and willing to ship".
What I don't get is this. Even granting that the issue with the economy is AD and nothing structural why are huge govt projects the most efficient way of increasing AD ? If the govt borrows (or prints money) to fund tax cuts wouldn't that have the same effects on AD as if the govt borrows (or prints money) for spending on building bridges roads etc?
The tax cuts approach would have the advantages that 1) they could take effect immediately and 2) they could be curtailed once they have brought AD back to the required level and 3) the end result is going to reflect underlying consumer preferences and not a central planner idea of that the economy should be doing.
BTW: I'm genuinely interested in the answer and happy to get into Keynesian theory if that is required to understand the need for big govt projects in this situation.
"Even granting that the issue with the economy is AD and nothing structural why are huge govt projects the most efficient way of increasing AD ?"
ReplyDelete(1) I have never said anywhere that the sole method used in expansionary fiscal policy is public works/infrastructure. Tax cuts, depending on how they are designed, can be an effective way of stimulating AD as well.
(2) but as it happens America is badly in need of large scale infrastructure spending:
"According to the Infrastructure Report Card put out by the American Society of Civil Engineers, America’s infrastructure grade is a “D,” and we would need at least $2.2 trillion over the next five years in order to get this grade up to an acceptable level. ... The United States is currently investing less on infrastructure as a percentage of GDP than Europe, China, and many emerging economies … America spends only about 2 percent of GDP per year on infrastructure investment (this includes federal, state, local, and private-sector spending). By contrast, that number is about 5 percent in Europe and between 9 percent and 12 percent in China. In developed economies, the average is about 3 percent of GDP."
http://etfdb.com/2010/three-etfs-to-play-americas-crumbling-infrastructure/
and this was back in 2010.
(3) "If the govt borrows (or prints money) to fund tax cuts wouldn't that have the same effects on AD as if the govt borrows (or prints money) for spending on building bridges roads etc?"
The effect is not the same. America's public infrastructure requires public investment spending, not simply tax cuts.
And anyway as I have said repeatedly on this blog the current mess, with its debt deflationary effects, requires some kind of radical measure to reduce the scale of private debt, reform the financial sector, impose effective financial regulation again, and then large scale fiscal policy will be properly effective.
ReplyDeleteSo the Keynsian penchant for big infrastructure spending is indeed based on the view that (at least in some circumstances) central planners do know better that the market.
ReplyDeleteOf course as An Austrian I hold the view that if you removed the huge tax burden on individuals and businesses (much of which is used to support a moribund bureaucracy and its bribed supporters) there would by a much bigger pool of resources available to the private sector , and that would lead to the required infrastructure investment taking place spontaneously.
But that's a whole different discussion.
Yes, I too believe that the market for infrastructure functions like the market for apples and there is no such thing as rivalry, excludability or natural monopolies.
Delete1) Why spending over tax cuts? Well, I think most Keynesians would say both, but primarily spending because it happens immediately (rather than next year in some tax cuts), and because its fiscal multipliers are considered to be higher for spending than tax cuts, and particularly supply-side tax cuts. Mark Zandi has made some pretty handy charts over the years of his analysis: http://2.bp.blogspot.com/_GMkD4mFrFxw/TH49Y6JmDoI/AAAAAAAAD1Q/SYY2OZaRMA4/s1600/Fiscal+multipliers+in+US.jpg
DeleteAlso you're getting into another story with the notion that infrastructure can be perfectly supplied by the private sector. We could get into 4000 years of history that points to major infrastructure achievements being constructed by the public sector rather than private. We could get into the collective action problems associated with relying on the private sector completely for infrastructure, as well as there being inherent profitability problems with many forms of infrastructure (how do you make profit from a dyke or levee, for example? Much less local roads). Basically, it's not as much a matter of central planning v. market preferences, it's rather often a matter of infrastructure or no infrastructure at all. Why else would you think the US has a $2.2 trillion infrastructure deficit?
Perhaps I'm blinkered by my Austrian background but I'm just not getting why private business would be bad at investing in infrastructure.
DeleteBuilding a multi-billion $ high speed rail-link (or a dyke or a levee) may stimulate business but if it cannot be operated at a profit then basic economics says it is a non-optimal use of those resources. What am I missing here ?
If the private sector took the entire cost of production on itself or shifted such costs to labor then it wouldn't have any very much profit are all.
DeleteThe use of public credit to finance infrastructure what reduces the cost of private production is the only route to national wealth. Public infrastructure is suppose to be non-profit or a service at cost and that is why it is valuable in real world economics.
But "free market" schools aren't real economics so they start with false premise of 3 factors of production rather than 4 (see Michael Hudson)
I currently saving up for a new batch economics books and research from which I believe I will able to construct a formal basis for the older American protectionist position that the position has always lacked. When we are done the Austrian school will be done for on the basis of first principles. Keynes and the Heterodox folks aren't safe either. It's going to be fun...
Professional scientists are not happy with your profession and we are about to take an axe to it because your dogma's are getting in the way of serious research.
"Of course as An Austrian I hold the view that if you removed the huge tax burden on individuals and businesses (much of which is used to support a moribund bureaucracy and its bribed supporters) there would by a much bigger pool of resources available to the private sector , and that would lead to the required infrastructure investment taking place spontaneously."
ReplyDeleteHow do you know this? This completely ignores market instability and uncertainty, both of which are Austrian principles in themselves.
I believe it based on theory and also think this is (to some degree) backed up by what actually happened following denationalization and deregulation in some key infrastructure industries in the 1980s and 1990s where those industries (on the whole) became more efficient and more innovative.
DeleteEven if I were to take your premise as true, can't the keynesians do the same thing: 1) claim its based on theory 2) point to some event in history where the theory may be consistent with reality (even if at some degree too)?
DeleteThus, I come back to my initial concern, where is the uncertainty aspect in this? So far, all I know is that your theory (whatever it is) is one that ignores uncertainty.
Wait, if you're an Austrian, then the phrase "central planners do know better than the market" is either true or nonsense. Mises was pretty adamant about decrying the sort of hypostatization inherent in the claim that the Market can "know" anything, as it is not an actor.
ReplyDeleteSo either central planners do know better, definitionally, than the fictitious entity of the market, or it's an outright nonsequitur.
Of course, if you're using "the market" as a placeholder that signifies all the individuals across the economy, then you have to contend with another issue: if people don't have the means to reveal their preferences monetarily, then democratic action becomes the only option. If people are voting for people who will redistribute money towards infrastructure, that is also a revealed preference. It weights each person's preference equally (with some variance based on institutional structure, but that's another issue), so it tends to realize preferences at the median instead of the mean.
I was trying to understand LK's views. I don't think that central planners are likely on the whole to be smarter than the market.
DeleteOn your second point - that bring me to mind of the expression "there is something wrong when democracy just means the right to spend other people's money"
The market is just a view of the mind, the reality is that major economic decisions will be taken by a few powerful/rich individuals in the end. You can try to say that, in the long-term, because those who fail will lose influence and those who succeed will gain influence, good decisions will outweigh bad decisions. However, while this may be true in the long-term, this conclusion can NOT be extended to the short-term and to any actual scenario we may be in front of.
DeleteFor example, before the financial crisis, the "market" as a whole, meaning the total of the largest investors (both individual and corporate), seemed to have put too much faith in the mortgage-backed securities, creating a huge bubble in the real estate sector. At that point, if there had been a government (aka central planner) who had decided to slow this bubble by using tax policies or regulations, wouldn't the end result have been better? The bubble may have been deflated before it burst and the resources that have been wasted in building up that bubble may have been affected to more useful ends.
As soon as we agree on the basic concept that a central planner can be "wiser" than dominant market actors, we have to judge situations on a case-by-case basis, and not simply assuming that the dominant market actors must be right.
"If the govt borrows (or prints money) to fund tax cuts wouldn't that have the same effects on AD as if the govt borrows (or prints money) for spending on building bridges roads etc?"
ReplyDeleteNo, due to the concept of multiplier: people given tax cuts spend only a portion of it; while government spending goes entirely into the economy.
"if you removed the huge tax burden on individuals and businesses (much of which is used to support a moribund bureaucracy and its bribed supporters) there would by a much bigger pool of resources available to the private sector , and that would lead to the required infrastructure investment taking place spontaneously."
The private sector can't afford to do infrastructure spending because it is not profitable.
They were given a chance in the 19th century, America's road system languished. In California, the postal service was weak until the government stepped in. With transcontinental railroads and interstate highways, new life was breathed into commerce.
This was all government's doing.
"No, due to the concept of multiplier: people given tax cuts spend only a portion of it; while government spending goes entirely into the economy."
DeleteBut if the idea is to get AD to a certain level then (as the market monetarists keep pointing out) the government (or the CB) can just keep creating money until the desired level is achieved - never any need for direct govt spending on purely economic grounds.
On the second point : I don't get why infrastructure spending would not be profitable. If its not profitable to private business that seems like a clear signal that it is not a good use of an economies resources , unless one believes that central planners will allocate resources more efficiently than the market - and it does seem that that is a theme on this site.
And even one of the major private transcontinental lines - that of James Hill - incorporated many ones that were state supported, so it was more akin to a privatisation than the "miracle" of free market economics:
ReplyDeletehttp://socialdemocracy21stcentury.blogspot.com/2011/07/government-intervention-james-j-hill.html
"No, due to the concept of multiplier: people given tax cuts spend only a portion of it; while government spending goes entirely into the economy."
ReplyDeleteThat's a first use fallacy again. People given tax cuts only spend a portion of it, but in a lower tax environment it may induce a larger sequence of real transactions.
It's the transaction sequence you're after - since that is real activity.
For example, if you give a general low end tax cut on transactions, for every £100 you inject via that route you may get say a dozen induced transactions from it before the impulse disappears as taxation and private 'excess' savings (ie bank reserves or Government bonds).
However if you conduct 'government spending' via interest payments on bonds to foreigners its very likely you won't induce any transactions at all before the excess ends up as reserves or Government bonds.
Similarly with any government spending where the primary purchase or the secondary purchase has a large profit share.
Government struggles to influence much beyond the first or second purchases with its spending.
I find the multiplier calculations bandied about extremely political - all designed to push a particular angle and backed more by supposed credentials than hard evidence.
Multiplers are very much down to 'who do you believe'.
"People given tax cuts only spend a portion of it, but in a lower tax environment it may induce a larger sequence of real transactions."
ReplyDeleteSure, but the same goes with government spending: money spent by government also induces a sequence of real transactions.
And again, people spend only a portion of what they receive in tax cuts, while government spending goes entirely into the economy.
"However if you conduct 'government spending' via interest payments on bonds to foreigners its very likely you won't induce any transactions at all before the excess ends up as reserves or Government bonds."
ReplyDeleteWhat are you talking about? This is flatly refuted by Frank Newman, who was Deputy Treasury Secretary during the 1990s, winner of the Treasury Department's Alexander Hamilton award, and knows more about how government facilitates spending than your obsequious remark indicates about you.
Read his book, "6 Myths that Hold Back America," where he details how governments finance deficit spending by issuing Treasuries. He destroys the myth that government spending "crowds out" private investment in saturated economies.
Your fallacious statement assumes that when governments deficit spend they do so by paying to holders of Treasuries. They do not. This happens when governments engage in austerity.
"And again, people spend only a portion of what they receive in tax cuts, while government spending goes entirely into the economy."
ReplyDeleteThat may be the case mostly, but it is the first use fallacy again.
As I pointed out the 'government spending' on Bond interest payments doesn't go into the economy very much at all.
And even if you buy something on the first use if the recipient of the government spending then saves all the income from that spending, then you are no better off.
And that is happening a lot at the moment with corporate profits. They are banking, not distributing dividends or investing.
You cannot conclude that government spending is better than tax cuts based on the first use. You have to analyse the entire spending chain induced and the aggregation that causes.
And as I said, the statistical process used to calculate that 'multiplier' depend on the political biases of those doing the calculations.
"Your fallacious statement assumes that when governments deficit spend they do so by paying to holders of Treasuries. "
ReplyDeleteI wasn't talking about all the government spending. It is just an example of a type of government spending that doesn't multiply very well.
Paying interest on Bonds has a very small amount of penetration into the real economy if those Bonds are savings (often foreign savings).
It has higher penetration if Bonds are really backing for Personal Pensions.
My point again is that the 'multiplier' is a political tool used to push a political ideology.
For a sovereign issuer, whether they use tax cuts or particular form of government spending is a political decision about how much saving they want to induce in the economy alongside the necessary transactions.
"the statistical process used to calculate that 'multiplier' depend on the political biases of those doing the calculations."
ReplyDeleteThe multiplier concept was developed by Keynes himself, who wasn't being political, just logical and rational. Regardless of what political decisions are made regarding spending, the multiplier effect is generally stronger for govt. spending, because again govt. spending goes entirely into the economy.
"the 'multiplier' is a political tool used to push a political ideology"
The "political ideology" was successful in making the US the economic superpower of the world.