More on Keynesians Loving the Boom
A few posts ago, I pointed out that Krugman unintentionally let slip the fact that he wants policies that reignite a boom. Naturally, a Krugman defender said I was nuts in the comments.
Perhaps this quote from Brad DeLong will be more convincing:
In the 12 years of the Great Depression – between the stock-market crash of 1929 and America’s mobilization for World War II – production in the United States averaged roughly 15% below the pre-depression trend, implying a total output shortfall equal to 1.8 years of GDP. Today, even if US production returns to its stable-inflation output potential by 2017 – a huge “if” – the US will have incurred an output shortfall equivalent to 60% of a year’s GDP.
In fact, the losses from what I have been calling the “Lesser Depression” will almost certainly not be over in 2017. There is no moral equivalent of war on the horizon to pull the US into a mighty boom and erase the shadow cast by the downturn; and when I take present values and project the US economy’s lower-trend growth into the future, I cannot reckon the present value of the additional loss at less than a further 100% of a year’s output today – for a total cost of 1.6 years of GDP. The damage is thus almost equal to that of the Great Depression – and equally painful, even though America’s real GDP today is 12 times higher than it was in 1929. [Bold added.]
I stand by my claim: Keynesians think the mark of a good policy is that it creates a boom. Especially after a major downturn, Keynesians want to see another boom to make up for it. Thus the Austrian critique is no caricature.
And for the finishing blow, let’s not forget this passage from The General Theory itself:
The remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus leaving us in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.
I don’t see how there is any argument on this point. The Krugman apologists should just say, “That’s right Murphy, we love booms. Why do you love unemployment? Are you more of a funeral than a wedding kind of guy?”
Don’t booms cause global warming? And doesn’t that require further extensive diktats from the “progressive” experts to tamp down the boom?
You would be right to say that Keynesians want macroecononic policies that will maintain strong real output growth, strong private capital investment, and low unemployment.
But the “boom” that Keynes is thinking of is not some empty financial asset or real estate bubble boom, and Keynesians deny that the Austrian business cycle theory is a correct explanation of cycles.
So your victory is rather a hollow one. Anyway, if booms do get too strong, with demand pull inflation becoming a problem, the answer is contractionary fiscal policy to reduce demand.
Also, I hear rumours of a debate with Warren Mosler!
Is this something you can confirm?
The debate is on like Donkey Kong.
Woohoo.
A well informed scientific prediction of the debate outcome:
money4nothingchicks4free said…
It all depends how is It carried out. On debates like this it is not that important who is right but who the audience thinks is right. Murphy has produced silly arguments against MMT so far. Coconuts and stuff. He is very afraid of Warren and he would rather not debate him, but he couldn’t say no. He is a monetary illiterate, at least few years back he was talking about money multiplier and Fed creating the danger of inflation by doing QE, once banks start lending again.
Murphy would like to take the debate on unrealistic grounds, away from reality, fantacy freedom land. That’s how most of the ideological Austrians argue any way. IMO he is not up to Warren and this is not going to be an interesting debate.Kind of like putting Bob Roddis against Warren, not as bad but still. Looking forward of seeing It though. Promotes MMT too. There is not even anything I can think to suggest to Warren, he is the best there is to present logical arguments.
http://mikenormaneconomics.blogspot.com/2013/03/lord-keynes-warren-mosler-to-debate.html
I’m flattered that this gentleman thinks my oratory skills surpass even those of barrister Roddis.
You would be right to say that Keynesians want macroecononic policies that will maintain strong real output growth, strong private capital investment, and low unemployment.
That is also what he had during the recent “empty financial asset or real estate bubble boom.”
Except these destabilising asset bubbles are NOT what occurred during the classic era of Keynesianism, when financial regulation was still effective, before it was made ineffective by neoliberal/neoclassic reformers, with their efficient markets hypothesis and rational expectations bunk.
LK,
So in 2009, do you think real estate prices should have been allowed to fall, or not?
Yes, allowed to fall back to their post-WWII average level, and they did too.
Hah! Trick question! Prices don’t adjust downward, quantities do.
Except these destabilising asset bubbles are NOT what occurred during the classic era of Keynesianism
No true scotsman, you rang?
Keynesianism INCLUDES “destabilizing asset bubbles”, because the inflation Keynesians want is what forms them in the first place. Keynesian policymakers have no clue how or to what extent asset booms “should” go on the basis of their own inflation.
It wasn’t “financial regulation” that mitigated the asset bubbles during the Bretton Woods era, it was the fact that the government couldn’t inflate as much due to being somewhat constrained to gold. But thanks to KEYNESIANS, that constraint was completely abandoned, and THAT is what allowed the inflation to spiral out of control and form the destabilizing asset bubbles.
Contrary to the bubbles being a result of abandoning Keynesianism, they are in fact a reflection of more and more Keynesianism being unleashed onto the hapless public.
You would be right to say that Keynesians want macroecononic policies that will maintain strong real output growth, strong private capital investment, and low unemployment.
Keynesian classifier:
Real estate boom that replaces tech boom (Krugman ’03) -> Good boom.
People “investing” in education that predictably turns out to be worthless -> Good boom
People investing their own savings in disruptive business models and technologies that obviate large sectors of the economy, while they maintain a strong cash savings buffer as a hedge against uncertainty -> Horrible recession that must be immediately remedied by “short term” loans to the obviated sectors of the economy and immense devaluation of those savings buffers so that such entrepreneurs are forced to spend spend spend, somewhere somewhere somewhere.
Did I get that about right?
Did I get that about right?
“…strong real output growth, strong private capital investment, and low unemployment.”
This is what is being referred to when the word “bubble” is used.
“But the “boom” that Keynes is thinking of is not some empty financial asset or real estate bubble boom, and Keynesians deny that the Austrian business cycle theory is a correct explanation of cycles.”
Booms aren’t only “empty financial asset” or “real estate” related. Booms encompass unsustainable lengthenings of the general economy.
“So your victory is rather a hollow one. Anyway, if booms do get too strong, with demand pull inflation becoming a problem, the answer is contractionary fiscal policy to reduce demand.”
The problem is not one dimensional excesses or deficiencies in “demand.” The problem is on the real side. Engaging in projects that require more real capital than exist and will exist.
Contractionary “fiscal policy” cannot solve excessive demand problems if they exist because regulators have no clue what the right quantity of demand should be.
Maybe we should define boom more clearly. If one thinks the economy ideally has a stable growth path, that is say 2-2.5 percent growth in real gdp per year on average from say the end of WW IIthen does “boom” mean:
1. GDP moving up to that path; or
2. GDP moving well above that path.
I’d think almost everyone would like to get to 1, that is to see actual GDP catch up to trend GDP. That would imply faster than 2.5% growth for a few years. Is that the boom Krugman wants Bob, or do you think he wants # 2, so much above trend growth that trend is passed, and we’re set up for the next crash.
I’m no expert on Austrian economics, but I think I may be asking if Austrian think a boom and bust does so much damage to the economy (misallocation and such) that effectively the trend growth path is permanently reduced by such cycles, and expecting to return to the old growth path and inmplementing policy to do so just fuels the next boom.
signed,
curious in Portland, OR.
I’m always excited when I click through as “Krugman defender” link on your posts and it’s not me 🙂
Not sure why…
Partly because I’m glad there’s more out there…
Partly because I’m glad I’m not a whipping boy in this particular case…
Daniel, I feel the opposite. I was quite pleased not to say elated that the “Krugman defender” was me.
Bob Murphy takes on a Krugman defender
http://diaryofarepublicanhater.blogspot.com/2013/03/bob-murphy-takes-on-krugman-defender.html
I never said you were nuts Bob nor do I have any reason to think you are. I do see that some of you folks-Bob Roddis in particular- have a none too flattering view of anyone who considers themselves-or he considers to be-Keynesians.
Bob Roddis certainly, whether or not he thinks they’re all nuts or not, has a very low opinion of them, seeing us all as basically beneath the pale:
“it is pointless and foolish to treat Keynesians as serious, thoughtful and/or honorable.”
Bob (Murphy) I think it depends on how you define “booms.” I mean many Keynesians don’t see the real estate boom as the kind of thing we want to see in the future either.
If a “boom” is simply a return to historical trends of growth then I support “booms.” If the choice is between Keynesain booms and Austrian Great Stagnations, that’s a characterization I can deal with.
Let the voters decide that one.
The most famous Keynesian on the planet wanted one back in ’03. He got what he wanted, and now all of a sudden housing booms are something no one wants to experience? He now uses his theoretical framework to prescribe policies such as having the U.S. government conjure up a plot to fake a space alien invasion for the purpose of a public works project that would be…….wait for it……..useless.
Austrian Great Stagnations? I’m not sure what planet you’re on, but it’s clearly not Earth. Where are these Austrians running the world’s Treasuries, Central Banks, and Legislative bodies?
Well they love austerity and we see austerity everywhere especially Europe. As we’re beneath trend everwhere and Austrians don’t believe in making up trend they should be pleased.
Their policy goal is permanent sub optimal growth. Right now that’s being achieved.
And by “Their” you mean Austrians or European central planners? If you’re referring to Austrians then I don’t think you’re understanding of what Austrians advocate is even the slightest bit remotely accurate.
Check out Cafe Hayek and you might learn that what is described as “austerity” in Europe is questionable at best. The talk of cuts is largely exaggerated; in some cases, there are actual increases in spending, at least in nominal terms.
BTW, from what I have read, austerity means lower government spending and higher taxes. It seems like lower governement spending and LOWER taxes would be more helpful to the economy. Higher taxes, esp. in a struggling economy, are not helpful.
By the way Lord Keynes I am an admirer of your work. Appreciate what you do.
Ron Paul was promising 10-15%/year real GDP growth during the primaries. That is certainly a boom, bigger boom than the US has ever seen in fact. 5% was not too optimistic, 10% to 15% was very doable under Austrian school. Continuous boom with no inflation.
Republican Debate
Aired June 13, 2011 – 20:00 ET
KING: I appreciate that. Well, welcome. If you’re out there and you don’t get the distinction coming into the night, Congresswoman Bachmann was exploring. She hadn’t taken that last step. The other candidates had taken it. I’m sure they welcome you to the fray.
Let’s continue the conversation. I want to come to Congressman Paul. You’re all here saying the president of the United States is making the economy worse. Has he done one thing — has he done one thing right when it comes to the economy in this country?
PAUL: Boy, that’s a tough question.
(LAUGHTER)
No, no, I can’t think of anything, but may I answer the question that you alluded to before about whether or not 5 percent is too optimistic? No, there’s nothing wrong without — without setting a goal of 5 percent or 10 percent or 15 percent, if you have a free- market economy.
We’re trying to unwind a Keynesian bubble that’s been going on for 70 years, and you’re not going to touch this problem until you liquidate the bad debt and the mal-investment, go back to work. But you have to have sound money, and you have to recognize how we got in the trouble.
We got in the trouble because we had a financial bubble, and it’s caused by the Federal Reserve. If you don’t look at monetary policy, we will continue the trend of the last decade. We haven’t even — we haven’t developed any new jobs in the last decade. Matter of fact, we’ve had 30 million new people and no new jobs, and it’s because they don’t — the people don’t understand monetary policy and central economic planning things.
Free markets will give you 10 percent or 15 percent growth or whatever (ph) and you will not have to turn it off because you think it’s going to cause inflation. It doesn’t work that way.
Well why not just promise anything? I mean 10-15% is such an extravagant promise no wonder no one took it seriously. He says there’s bheen some “Keynesian” infection over 70 years. So prior to this did we average 10-15% GDP? Of course not.
It’s like when Gingrich promised $2.50 gas. Some promises are not even worth taking seriously.
Exactly what might be the relevance of Gingrich to anything we are saying?
Bob if you maybe read the very short post you might gain understanding. I was simply likening Haye’ls absurd talk of 10-15% growth to Gingrich’s abusrd talk of $2.50 gas.
You had before had that link about Dick Nixon so you too sometimes change the subject. If that’s the best you can do no wonder you post so seldom on your blog.
Bob Roddis maybe you can offer something other than mindless snark. You claim to be totally against central planning and that Hayek’s “knowledge problem” cinched that.
Yet you talk about nothing more than “fractional reserve funny money” How do you justify this huge government interference in the banking system?
Why can’t people freely choose to use fractional reserve banking as they clearly show they are willing to do?
You may think DeLong is advocating a boom to get us back to growth trend, but you would be wrong. He is only advocating something that looks like a boom, sounds like a boom, and smells like a boom, but is actually something else.
Well clearly you have a mind with such mindless, substanceless insults.
Where was the insult, dude? This was basically your position. Hell, DeLong even called it a boom himself. Murphy’s case seems to be proven and closed.
You diisappoint me that you have to descend to that so quickly.