08 Dec 2012

Papola Has a Barrel of Ink

Daniel Kuehn, Economics 27 Comments

Uh oh, I think John took it personally when some people accused him of dishonesty and/or ignorance. (Words hurt, kids.) Remember, the issue here is that John in his latest Christmas video is taking on the “fallacy” (his term, which he attributes to Keynes and others) that consumption drives the economy, and that if everyone just consumed more, the economy would be fine. Some people said this is a total misreading of Keynes, and that Keynesianism says no such thing. So John defended his honor and struck back with this in the comments over at Daniel Kuehn’s blog (I’m not going to bother fixing the hyperlink formatting):

http://www.themoneyillusion.com/?p=17187

Here’s LAURA D’ANDREA TYSON and OWEN ZIDAR in the NY Times:

http://economix.blogs.nytimes.com/2012/10/19/tax-cuts-for-job-creators/

“These demand-side forces explain why consumption goes up much more after tax cuts for the bottom 95 percent than after equivalently sized cuts for the top 5 percent. An increase in consumption, which still accounts for about 70 percent of G.D.P., fuels increases in demand, and that leads companies to create more jobs.”

Here’s Paul Krugman in the NY Times:

http://www.nytimes.com/2008/10/31/opinion/31krugman.html

“No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.”

Shouldn’t he be talking about retrenching business spending? Ehem. Yeah.

Here’s Henry Blodget:

http://www.businessinsider.com/companies-need-to-share-more-profits-with-employees-2012-12

“American consumers — the folks who account for ~70% of the spending in the economy.

Almost every dollar these folks earn in salaries gets spent — on food, clothing, houses, education, entertainment, cars, and other goods and services that big American companies produce. So, if, instead of hoarding their wealth by hiking their profit margins ever higher, companies invested more in employees and equipment, they would help the whole economy.”

Sure sounds EXACTLY like Thomas Malthus to me, there, Gene. The rich capitalists should pay their worker more since workers consume more as a share of their income. Why not just take a page from William Spence (before Malthus) and have the rich pay the poor to blow glass bubbles and then smash them?!?!?

I could go on and on and on right through Christmas day. I’ve produced a video aimed at confronting a very real fallacy being put forward by economists who should, as you note, know better and a broader media class who disseminates an even cruder version of it.

27 Responses to “Papola Has a Barrel of Ink”

  1. Daniel Kuehn says:

    It appears to me these are all different questions:

    1. Does a higher MPC help the economy recover?
    2. Does increased consumption help the economy recover?
    3. Was a shock to consumption what caused the crisis?
    4. Did Keynes say that a shock to investment or consumption cause crises?
    5. Can a shock to consumption cause a crisis?
    6. Given the immaturity of financial markets and relatively low capital intensity of production in Malthus’s time, was Keynes’s explanation really appropriate back then or did Malthus do OK for describing his times?
    7. Do our humanitarian policies have macroeonomic payoffs (short run or long run)?
    8. Do our long run macroeconomic policies have short run payoffs?
    9. Do our short run macroeconomic policies have long run payoffs?

    It seems that in a lot of this discussion these questions – which are quite different – are jumbled together. Most prominently I would answer “yes” to 1 and 2, “no” to 3, and “investment” to 4.

    • Daniel Kuehn says:

      I’d say:
      1. yes
      2. yes
      3. no
      4. investment
      5. yes
      6. quite likely – if nothing else he was on the right track
      7. yes
      8. often
      9. often

    • Silas Barta says:

      Thanks for putting in this form.

      1. no, the health of “the economy” is indifferent to the extent to which people consume
      2. no, same reason
      3. no, the political “fix” to the shift in preference was the critical factor
      4. either depending on hermeneutics
      5. as in 3, not by itself
      6. his explanation sucked then too
      7. some can, most do not (in expectation)
      8. if a payoff can be negative too, yes
      9 same as 8

      • Major_Freedom says:

        Silas beat me to it.

        What’s remarkable is how DK can feign offense at my argument that Keynes’ doctrine is based on consumption, and yet there is DK, self-professed Keynesian, saying consumption drives the economy.

        • Daniel Kuehn says:

          1. In what sense do you mean “drives”, and
          2. When did I say that? (quote me, please – let’s cut through the BS).

          Must I think that consumption is completely irrelevant to output to not be a consumptionist type? I took my argument to simply be that consumption is not the driving force of the business cycle and ought not to be the primary avenue of recovery. That’s all I’ve ever intended to claim.

          • Major_Freedom says:

            You’re right, you did not use the specific word “drives”, but some other word or words, therefore everything I said is off base.

            Only if I say “dog” rather than “canine”, after someone says “dog”, am I not misrepresenting them.

            You don’t have to say consumption is “completely irrelevant to output”. Just that consumption does not “help economies recover” (what I understand as “drives the economy”.)

            I don’t distinguish between what drives/recovers an economy during booms and what drives/recovers an economy during recessions. IMO, there is only one thing that ever drives an economy, and it doesn’t matter if there is 0% unemployment or 99% unemployment: Saving and investment.

            Even in the deepest of depressions, saving and investment is the only thing capable of driving the economy forward. There is nothing inherent in the physical world that suddenly alters economic laws when unemployment goes from X to X +1 people, or from Y to Y+1 percent.

            More consumption is a consequence of saving and investment, not a generator of it. If there is no consumer spending, then that doesn’t mean investment stops. It will mean investment will take place at the individual level, which I will call “autistic investment.” Producers will simply start producing for themselves. They don’t need external consumers in order to live. But those who can’t produce, they completely depend on producers. Producers don’t depend on consumers. Consumers depend on producers; if not themselves, then others.

            Consumer spending is not on par with investment spending just because it “adds to aggregate demand”. More consumption can only ever shrink an economy’s wealth. Too much consumption in a division of labor society, where nobody even knows the total supply of capital, can lead to “eating the seedcorn”, i.e. capital consumption. But Keynes held that if the marginal propensity to consume is equal to unity, i.e. everyone consumes out of 100% of their incomes, then that will supposedly drive employment and output. Think about that. Nothing but consumer spending, and thus zero demand for labor and zero demand for capital goods, will supposedly boost employment and output.

            “Putting money into the economy” doesn’t help anyone. The only thing that helps others is being productive. Sellers who recieve money only receive something of value to the extent that money can buy goods. Sellers don’t sell to receive money. They sell to receive that which money can buy. If they receive more devalued money, they’re no better off.

            If wealth consumers (i.e. businesses who made bad decisions) receive more money due to inflation, then consumers are worse off.

            “Putting money into the economy” is part of a process of rewarding oneself with what money can buy after being productive such that one earned money.

            It is not the case that because consumer spending and investment spending both add to aggregate demand, that if aggregate investment spending doesn’t increase, then increases in consumer spending are “better than nothing”. In these situations, more consumer spending will only impoverish the community. It would be like people being paid to destroy capital. Yes, they’re “moving”, yes “resources are moving”, but the process is one of impoverishment, not enrichment.

            You keep saying that Keynesianism is not consumptionism, but Keynes held that in a free market, the fact that saving out incomes takes place, which supposedly results from too low a rate of return, the free market will allegedly suffer from chronic unemployment. He held that only government budget deficits which increase consumption can get the free market out of this inevitable funk.

            He was absolutely clear that more net investment spending cannot make inevitably depressed free market economies recover, because he fallaciously believed that more net investment will only decrease the rate of return further, when in reality it will ADD to economic profitability (which I won’t get into at this time).

        • Lord Keynes says:

          The correct thing to say is that “demand drives employment and output”.

          Demand here also involves demand for capital goods and factor inputs as well, not just consumption.

          And demand is not the only thing driving output, of course, just as Keynes recognised.

          The expectations of business people, interest rates, expected profits etc. have a lot to do with it.

          • Major_Freedom says:

            The correct thing to say is that “demand drives employment and output”.

            No, the correct thing to say is that saving and investment drives employment and output. “Demand” is not specific enough. For if “demand”consisted solely of consumer spending, then the demand for labor and for capital goods would be zero, and thus employment would be zero and output would collapse.

            Demand here also involves demand for capital goods and factor inputs as well, not just consumption.

            That’s why the correct thing to say is saving and investment, not “demand”.

            And demand is not the only thing driving output, of course, just as Keynes recognized.

            To bad he “recognized” a non-existent malaise to free markets, which is saving out of income, which supposedly results from too low a rate of return on capital that results from allegedly too much investment, which lead him to believe that ONLY more consumer spending can drive/recover the economy.

            The expectations of business people, interest rates, expected profits etc. have a lot to do with it.

            Entrepreneuers take into account two demands and two sets of prices, not just output demand and output prices.

            • Lord Keynes says:

              “… which lead him to believe that ONLY more consumer spending can drive/recover the economy.

              LOL… more proof that you’re a liar, a joker, or an utter ignoramus.

              • Matt Tanous says:

                For someone who took his name as a net handle, you aren’t all that familiar with what Keynes wrote. He noted that investment was too small of a demand to do what he wanted, so sought more consumer spending. The fact that he called government spending something different from consumer spending was just another error.

              • Lord Keynes says:

                (1) M_F asserts that Keynes said that “ONLY more consumer spending can drive/recover the economy.” That is pure rubbish.

                (2) You say:

                “He [Keynes]] noted that investment was too small of a demand to do what he wanted, so sought more consumer spending.”

                Oh, do cite me where Keynes said this, please.

              • Major_Freedom says:

                It’s neither a lie, nor a joke, nor an ignorant statement. I explained why already.

              • Major_Freedom says:

                I already explained that Keynes believed there is a limit to profitable investment, and that additional saving cannot be accompanied by additional investment (declining MEC for fallacious reasons), and that the only solution is more consumption spending via government budget deficits.

                You don’t understand Keynesian theory.

    • Seth says:

      DK:
      “1. Does a higher MPC help the economy recover? yes
      2. Does increased consumption help the economy recover? yes”

      I would think this confuses cause and effect. A higher MPC is a effect, not a cause.

      A higher MPC that results from value creation does improve the economy, but it’s the value creation that causes that.

      Changing MPC without value creation destroys value.

  2. Daniel Kuehn says:

    I don’t think John is being dishonest, btw – I think he’s being sincerely and unintentionally misleading.

    • Gee says:

      Your not being dishonest either, just mushy.

      • Daniel Kuehn says:

        Tell me what I can clarify – I don’t intend to be mushy.

        That’s why I broke the issues we’re tossing around out it into nine questions above. If you have additional probes I’m happy to respond to them.

  3. Bob Roddis says:

    “And we really don’t need a public that thinks demand isn’t the primary driver of unemployment right now.”

    DK, December 2012.

    http://factsandotherstubbornthings.blogspot.com/2012/12/econstories-wants-to-just-present.html

  4. Bob Roddis says:

    Signs of lying:

    Giving you too many facts and details.

    If after the liar replies to your question, you don’t say anything, he adds more details that you didn’t ask for.

    http://www.way-of-the-mind.com/signs-of-lying.html

    • Lord Keynes says:

      Sounds like the tactics of numerous Austrians on this blog.

      • Major_Freedom says:

        Totally unexpected Burn!

        • Major_Freedom says:

          LK doesn’t understand that it applies especially to him.

        • Bob Roddis says:

          I think these permanently unresolvable disputes between libertarians/Austrians and the statist horde boil down a simple difference in world views and emotional make-up. Libertarians think average people are smart enough to manage their own affairs. Statists think average people will run society off the track unless they are guided by the wise, omniscient and benevolence of the statist himself. The statist has an obsession to involve himself in everyones’ affairs while libertarians have no such desire other than establishing a regime that protects property and contract rights.

          This explains the platinum coin. Constitutional gold and silver money leaves determination of the value of that money to the people. The “value” of the platinum coin is determined by the Kleptocratic Keynesian Bureaucracy. “Natural” prices are prices set by the people themselves (and we can’t allow that!). Distorted prices are prices distorted by the actions of the Kleptocratic Keynesian Bureaucracy.

          The Keynesian naturally recoils from this analysis. The Keynesian, obsessive about involving himself in everybody’s business, recoils from allowing average people to even set their own prices and has concocted this elaborate hoax to justify his destructive and obsessive interventions.

  5. John Papola says:

    I’ve responded in as complete a way as I can over on Daniel’s latest post.

    http://factsandotherstubbornthings.blogspot.com/2012/12/a-little-more-on-john-papola.html

    Have a read.

    • Major_Freedom says:

      “As John Stuart Mill noted, the demand for commodities is not the demand for labor.”

      and

      “The decision to hire is NOT some hydraulic reaction function of aggregate demand”

      These two statements are very important.

      Good set of posts.

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