Believing Is Seeing
Presumed “wonk” Neil Irwin writes:
The [latest GDP] report details this stuck-in-neutral economy. It’s not without bright spots, but there aren’t enough of them, and they aren’t bright enough to make up for the forces dragging the recovery, most significantly a drop in government spending.
Indeed, the biggest culprit in the weak report was the government sector, which fell at a 4.1 percent rate, after a 7 percent pace of decline in the fourth quarter. The fall was universal — at the federal, state and local levels. The U.S. government is in pullback mode, and whatever one thinks about reducing the size government in the long run, for now it is unequivocally the villain in slowing growth. If there’d been no change in government spending over the last six months, GDP growth would have averaged a respectable 2.55 percent, not the current soft 1.45 percent. [Bold added.]
Why yes, Mr. Irwin, I agree: If you simply assume without even realizing it that the Keynesians are right, and that their opponents are wrong, then the Keynesians will be vindicated “unequivocally” by the data.
As opposed to your last post, where the data strongly confirms the Keynesian story, but not yours?
If stimulus is counterproductive, then why didn’t real output plunge even further when the stimulus was implemented?
We also rarely any discussion of countries other than the US. Why did stimulus work in so many other countries? E.g., Norway, Germany, South Korea, Australia, etc.
“As opposed to your last post, where the data strongly confirms the Keynesian story, but not yours?”
No, the data STILL “strongly confirms” the laissez-faire story. Had the reduction in government spending been larger, and taken place much earlier, then growth would have otherwise been higher now. But because government spending remained high, and fell only slightly, economic progress was lower as a result.
“If stimulus is counterproductive, then why didn’t real output plunge even further when the stimulus was implemented?”
Real output was lower, than what it otherwise would have been without the stimulus.
It is not necessary that growth falls temporally, before the data can be said to show that government spending shrinks growth. The data is to be interpreted as being lower than it otherwise would have been without the stimulus, and with enough time for investors and producers to adjust to the growing sovereign consumer market forces manifesting themselves.
“We also rarely any discussion of countries other than the US. Why did stimulus work in so many other countries? E.g., Norway, Germany, South Korea, Australia, etc.”
Except stimulus didn’t “work” in those other countries. Growth in those countries was far lower than it otherwise would have been had there been more laissez-faire activity for longer periods of time. But because of the government intervention, growth was lower than it otherwise could have been, even if growth rose temporally from one period of time to the next.
It’s like you Keynesians believe that if you hit people over the head repeatedly, and yet they are strong enough to be able to produce enough over time such that growth rises from one period of time to the next, you Keynesians will claim that it was your bashing people over the heads causes economic growth.
Your theory is warped, and so you see in the data what you want to see, which is precisely Murphy’s point in this blogpost.
Ask LK if the basis of his “stimulus has worked” claim is GDP data.
“Why did stimulus work in so many other countries? E.g., Norway, Germany, South Korea, Australia, etc.”
You could not better confirm what Bob wrote. Don’t you realize that this conclusions (like stimulus worked) you make follow only from your preconceived thought that Keynesian theory is true?
“preconceived thought that Keynesian theory is true?”
lol.. Austrians also have “preconceived theories”. If the mere use of a “preconceived” model of how an economy works is somehow invalid, then ALL economists — including Austrians — are wrong.
You say I have a “preconceived theory”. Correct — a prior theory CONFIRMED by a mountain load of empirical evidence.
The real question is whether the preconceived theories are true.
I’ll give you one example:
(1) widespread fixprice markets are a reality through all major capitalist economies, and
(2) quantity signals induce changes in private sector output and employment in fixprice markets.
Meanwhile, Austrians like you live in a fantasy world where you think that prices are universally flexible and set by businesses to clear markets. They are not .
Reality is described by propositions (1) and (2), and it follows from them that inducing changes in quantity signals (demand, sales orders, sales volumes etc.) will increase output and employment.
I never seen one Austrian other than Lachmann who seriously recognised this. And what do you know!? Lachmann supported stimulus in a depression.
LK,
That is the whole point. Austrians admit that their theory is “preconceived” because it is impossible to look at a few historical data points and deduce from it the right theory since every data point is the result of complex inputs that are not testable under laboratory conditions which means you already need a preconceived theory to interpret the data.
Hence you cannot say to Bob:” See stimulus worked in Germany!” Do you understand what I mean by that?
“The real question is whether the preconceived theories are true.”
Yes I totally agree with that sentence, yet you think that your theory is confirmed by historical data you already interpreted with the theory you try to prove!
I also have an example that makes it so hard for me to follow Keynes: How does “real” output that was created by effective demand only due to government spending or CB meddling with interest rates transform into “real” output created by effective demand due to the market, instead of just being another bubble that bursts a few years later when the government or/and the CB stop stimulating that demand leaving behind only huge amounts of bad debt in the system that need to be liquidated one way or another?
Lk,
I really think that my question above is reasonable, is it not? And as long as I cannot answer that question I probably will not be able to switch to the Keynesian side of the argument.
Your question was reasonable. That’s why LK deflected.
“Austrians also have “preconceived theories”.”
Thanks for admitting that Keynesianism is based on preconceived theorizing, not empirical data driven induction.
Now that you have admitted as much, the next step is for you to compare and contrast the theories with each other, abstracted from the historical data. Woops, Austrians win.
“If the mere use of a “preconceived” model of how an economy works is somehow invalid, then ALL economists — including Austrians — are wrong.”
It’s not the fact that Keynesian theory is preconceived that makes it wrong. Keynesian theory is wrong because it contains internal contradictions, and violates economic principles grounded on human action.
“You say I have a “preconceived theory”. Correct — a prior theory CONFIRMED by a mountain load of empirical evidence.”
Laissez-faire theory is CONFIRMED by the same exact data. Every time you see data changing, the laissez-faire theory holds that growth and prosperity would have otherwise been HIGHER had laissez-faire activity been more wide-spread for a longer period of time. The data is 100%, fully, totally and completely consistent with laissez-faire economic principles. The laissez-faire theory is being confirmed and has been re-confirmed since the dawn of civilization.
The theory asserts that the more laissez-faire activity there is, the greater sustainable growth and prosperity there will be. So whatever history looks like, because there was less than 100% laissez-faire activity, the growth was otherwise lower.
“The real question is whether the preconceived theories are true.”
That is exactly where Keynesian theory collapses like a house of cards. It is exactly why you are wedded to historical data. It’s because you can’t defend Keynesianism a priori.
Imagine a laissez-faire theorist who ONLY refers to historical data, where no matter what the historical data shows, the laissez-faire theorist will claim that if there was more laissez-faire activity, (sustainable) growth and prosperity would have been higher. This is EXACTLY how Keynesianism is defended, day in, day out, by its followers.
No matter what the data shows, Keynesians claim that Keynesian theory has been proven right and anti-Keynesian theories have been proven wrong.
“(1) widespread fixprice markets are a reality through all major capitalist economies, and”
You keep spewing the same weak points as if they’re justification for state violence.
Producers “fixing prices” is not “market failure”. Fixing prices are a reflection of individual property owners desiring to avoid losses (and earn gains). This is like wage earners “fixing their labor price” above the market price for their labor, and being unable to find willing buyers. This isn’t market failure, this is individuals desiring to avoid losses (and seek gains). By waiting out for higher wage rate offers, the wage earner hopes to lock in a higher income.
Human action itself is seeking gains and avoiding losses. Every individual does this. The fact that people are not omniscient, and cannot know 100% whether their hold out price is going to be successful in terms of finding willing buyers when the individual expects to find a willing buyer, does not mean that the market failed. That is the market process in action. The market process is succeeding in revealing to sellers and wage earners which hold out prices are optimal and which are sub-optimal. The market process itself is the only source by which individuals can learn which hold out prices will remain requests without buyers, and which hold out prices will find buyers.
“(2) quantity signals induce changes in private sector output and employment in fixprice markets.”
Quantity is a consequence of technology, capital, and preferences. All of which can only be put to use in a context where individuals are free to decide which technologies are worthwhile, which capital is worthwhile, and what preferences exist.
“Meanwhile, Austrians like you live in a fantasy world where you think that prices are universally flexible and set by businesses to clear markets. They are not .”
Contemptible straw man.
No, Austrians do NOT believe that prices instantly change without any subjective learning process or trial and error.
Austrians hold that human action contains both successes and errors. However, since Austrian economics is value free, it does not infer from this fact whether or not government intervention is “justified” or “unjustified.” However, Austrian theory can explain why the economy goes through booms and busts given certain phenomena are present, such as non-market intervention in money and interest rates.
“Reality is described by propositions (1) and (2), and it follows from them that inducing changes in quantity signals (demand, sales orders, sales volumes etc.) will increase output and employment.”
Non sequitur.
“I never seen one Austrian other than Lachmann who seriously recognised this. And what do you know!? Lachmann supported stimulus in a depression.”
You’re only citing Lachmann because he sanctioned violence just like you. His theories are all completely secondary. he supported state intervention, and that is enough for you to trumpet him as a “good Austrian.” Meanwhile, anti-violence Austrians such as Rothbard, they are only cited for purposes of showing what’s (allegedly) wrong with Austrian theory.
You’re just whoring out whatever theorist serves your agenda of thirst for an elite group of people to impose control and violence over everyone else. Everything else is smoke and mirrors.
(1) “You keep spewing the same weak points “
So you admit propositions (1) and (2) above are true!
(2) “No, Austrians do NOT believe that prices instantly change without any subjective learning process or trial and error.”
Didn’t accuse Austrians of believing that “prices instantly change without any subjective learning process or trial and error”. I said they think that prices are “universally flexible and set by businesses to clear markets”.
Your straw man simply reinforces my point, since you’ve already implicitly conceded the truth of the main points about fixprices as described in propositions (1) and (2) above.
Impressive stuff.
“So you admit propositions (1) and (2) above are true!”
Of course they’re true. Sellers do in fact “set” prices according to the full costs of production, plus competitive profit. Restaurants do this all the time. Even if the offered prices attract just a single buyer, the restaurant owners will typically not reduce their prices until the restaurant is full. They’ll sell only one meal that day. Of course, they can’t keep doing this, because the full costs of production include “fixed” costs like rent, electricity, and to some extent wages, will be greater than their revenues, and at some point they’ll go bankrupt. But the prices that are actually paid, will be prices that do not incur losses on food sold, on average (assuming there are some “loss leader” food items, to attract customers). If the restaurant has one customer or 100 customers in a day, such that nominal demand fluctuates significantly, everyone pays the same price. That is “price fixing.”
This isn’t an example of “market failure.” To believe that because the restaurant won’t reduce prices to whatever extent is necessary to fill the restaurant every minute of every day, to believe that prices have to adjust up or down with every change in nominal demand, is nothing but a consequence of adhering to a fallacious theory of pricing (MR=MC?), and inferring that because prices aren’t set like that in the real world, that there is allegedly something wrong with the real world.
Adhering to the marginal revenue doctrine of pricing is due to not understanding the role that money costs, full money costs, play in pricing of many goods. For many people, such as yourself, price fixing is resented because it is intolerable to you that sellers would refuse to incur losses and “deprive” customers of goods that allegedly a priori belong to “society”, where the sellers are mere caretakers and stewards for “society’s” resources.
“Didn’t accuse Austrians of believing that “prices instantly change without any subjective learning process or trial and error”. I said they think that prices are “universally flexible and set by businesses to clear markets”.”
Distinction without a difference, because the only way that markets can actually clear, which is something that Austrians do not believe can actually take place (only a tendency for it to occur), then yes, prices do in fact have to be instantly flexible to every single change in demand. Anything less and the market won’t actually clear.
Your understanding of Austrian economics is based on straw men that you wished were true, as opposed to being true, because you need Austrian economics to hold these absurd abstract views of economic categories such that by knocking them down, you believe you’ve knocked down Austrian economics.
Austrian theory holds that prices do fluctuate, but in a way that tends towards cleared markets. It doesn’t hold that the ERE (abstract tool of mental thought of cleared markets) is actually attainable in the real world.
Your straw man only reinforces Austrian theory.
I prefer the current “flat” government spending to a resumption of slow or rapid government growth. (I think absolute cuts in the level of government spending would be better still.) On the other hand, these measures of gonverment “spending,” don’t include transfers including paying medical bills through medicare and medicade. The most out of control elements of government “spending” (which are called outlays) aren’t included. What is happening is that total government outlays continue to climb, leaving the government less to spend on the provision of current government services or investment (like government buildings, roads, and so on.)
Anyway, if government spending grows more slowly, then ceteris paribus, the private sector needs to grow more quickly. More production of consumer goods or private capital goods. (These could be exported, this sort of analysis is typically national.)
The notion that potential output is constant (or remains on a constant growth path) is no longer the basic assumption in orthodox macroeconomics. For Market Monetarists (and other monetary equilibrium/disequilbrium theorists) this is a welcome change. The current “official estimates show real output substantially below potential, but potential is substantially below the 3% trend of the Great Moderation.
There was no unusually large increase in real output during the Great Moderation. It was all pretty consistent with a growing labor force, saving and investment, and improvements in technology.
Now, there was a really big boom in housing prices and a more modest boom in housing construction. The boom in housing prices did not cause an increase in real output. “Austrian” pundits who tie housing prices to consumption spending are guilty of vulgar Keynesian thinking. There is no hint of this in Mises or Hayek (or Garrison or Murphy, I think) but when we get down to the Austrians advising people to sell their stocks and buy gold based upon their insights, we get some kind of balled um confused mess of Austrian theory and pre-Keynesian real bills banking nonsense.
Now, if there is a shift away from the production of housing or goverment goods and services, then potential output will be depressed for a time. The measures might not catch this effect because it has to do with a larger than usual obselescence of physical and human capital. This is happening all the time, but “structural factors” have much the same effect.
Austrian economists (including good ones) emphasize this factor because they use the ERE as an implicit baseline. Suppose the economy had actually settled into such an equilibrium. The market interest rate is pushed down below the natural rate due to money and credit creation. Then we move towards a new ERE (and somehow make substantial progress, and I think complete adjustment to the new ERE.) Only later is this discovered to be unfeasible and we “return” to the old one.
Events that would be more likely to have this effect were a long settled governent sector that was suddenly decreased in size. The specific skills and capital goods appropriate to the proviision of these governnent services would be obsolete. No longer very useful to the production of capital goods.
An other alternative would be a decrease in saving. After saving rates had been constant for many years, they permanently are reduced because people want to eat drink and be merry a bit more. The shift in the allocation of resources away from capital goods to consumer goods would be very disruptive and painful.
Or, suppose after decades of government policies aimed at promoting single family residences through a host of interventions, the result of which are people live in bigger houses, the policy changes and people shift to living in smaller spaces.
All of these things are posisble. But does an expansionary monetary policy actually keep market rates below the natural interest rate long enough to allow an entire capital structure to be built up around that disequilibirum price? I have my doubts.
Of course, a long period of monetary growth can lead to much higher nominal incomes, output prices, and wages. If you assume that this are out of line with the stock of monetary gold, then this long “boom” perhaps might be thought to require a major bust and deflation of prices and wages to return to a level consistent with the nearly fixed quantity of monetary gold. I think a good many amateur Austrians have just this in mind. And they even go so far as to confuse the excessive nominal value of capital with real malinvestment.
“excessive nominal value of capital” = artificial purchasing power.
The seller wouldn’t have accepted the artificial purchasing power had he known it was artificial.
The seller obtained less real purchasing power by trading for the more recently printed money substitutes than he otherwise would have; A malinvestment.
Also, in the Austrian view, the economy can’t settle into an “equilibrium” [qualified] when that which is used as the currency isn’t at least 100% backed by a commodity (if not being the actual commodity), because the “equilibrium” we speak of is where all trading happens voluntarily and without fraud.
(There’s some differences of opinion on what is meant by “equilibrium”, here, or whether the Austrian theory can justify its use at all. I say it’s better to not use it, but Hayek used it for convenience [it seems to me, from what little I’ve gathered so far], so we kind of have to use it sometimes.)
While auto production rose in 1907, buggy whip production fell. Whatever your views on long term buggy whip levels, the fall in buggy whippery was unequivocally …
…not the whole economy?
re: “GDP growth would have averaged a respectable 2.55 percent, not the current soft 1.45 percent”
Yup, they have trouble with the notion of the “unseen” cost. Obviously the money to keep government spending up would have been borrowed from the private sector which would have displaced private borrowing and lowered the private sector GDP.
An investor can only do one of a limited set of things with each $: lend it to the government, invest it privately in this country, invest it outside this country, or stuff it in a mattress. If they don’t lend it to the government, the odds are they will invest it privately instead (for a company to improve its growth rate, or startup, rather than wasted on say “digging a ditch and filling it in” or a “bridge to nowhere”).
There is tiny chance that some of the money would have been increased investment in treasuries from foreign investors that wouldn’t have come into the US to be invested privately, but it seems a likely small impact in comparison to the crowding out effect.
Somehow economists get away with trying to obfuscate that simple reality, trying to claim “oh, interest rates aren’t rising so crowding out can’t exist”.. ignoring other possible explanations for that. For instance “flight to safety” where there is demand for safer investments, bank lending standards being raised after the crisis (leading to a drop off in demand given people won’t apply for loans they can’t get, etc, e.g. see graphs of lending standards and demand on this page:
http://www.politicsdebunked.com/article-list/obama-lied-about-paying-down-the-debt half or two thirds of the way down (the page starts out on a related topic then gets into why the debt is a concern).
Private sector is not going to invest heavily in real estate when the economy is recovering from twin real estate bubble. So is the 6 trillion borrowed the past 4 years going primarily into equipment and software? You’re talking about at least doubling the amount invested in equipment and software during the past 4 years. You really think that’s likely?
Investment in Equipment and Software:
2009 898.2
2010 962.1
2011 1,074.7
2012 1,157.9
There is a reason you started that graph in 2008, for those who don’t know they can see this Fed graph:
http://research.stlouisfed.org/fred2/series/NRIPDC96
Which shows 2012 just recovering beyond 2008. DId you purposefully ignore that year or did you really not grasp this? Obviously the population has grown in the meantime, and likely there is a backlog of demand.
It isn’t clear where you get the “at least doubling” investment in that particular category from.
There is a difference between investing in real estate for the sake of speculation, and doing so to open a new location or factory. High levels of productivity require high levels of equipment and software. There are other uses for loans (and some would be forced up the risk curve for more of them, especially if this had led the economy to perform better) I suspect those that think there wouldn’t be a place for investment to go haven’t spent much time talking to actual business people.
“Obviously the population has grown in the meantime, and likely there is a backlog of demand.”
There is always a backlog of demand. Demand for goods in general always outstrips the ability to produce goods.
“There is a difference between investing in real estate for the sake of speculation, and doing so to open a new location or factory.”
Opening a new factory is speculative activity.
re: “Opening a new factory is speculative activity.”
Yup, I meant the poster above was referring to the real estate market in terms of the real estate itself being an investment, so the point was merely that others might invest in real estate for the sake of another business purpose rather than seeing the value of the property itself as being an investment. (obviously they balance the gain of the business investment vs. potential loss or neutrality fo the use of funds for the real estate)
Why would anyone refer to Keynesian advocacy as scientific? Was it his “animal spirits” explanation for market failure? His misunderstanding of Say’s Law, his invocation of magic with his ‘Keynesian multiplier”, how his theories violate the laws of scarcity, how his theory was was actually considered debunked and considered the mark of a bad economist 50 years earlier. And where is the falsification? Stagflation?
In fact, Keynesians ( Monetarists and MMTers as well) are the modern equivalents of the blood letters. They won’t/can’t consider the possibility that their cure could possibly be the cause of problem. When the patient continues to get worse, they apply more remedy. If he dies, they got to him too late for the remedy to work. If the patient happens to survive, it is because of their cure.
The reason LK ‘misunderstands’ simple Austrian concepts is because he knows they destroy his worldview. And he can’t attack them on their own terms because they are self evident.
Totally off topic, but I think I found something troubling:
“Cieszkowski divided human history into three phases after the fashion of medieval millenarians such as Joachim of Fiore, to whom he refers in his later works. The period of antiquity had been dominated by feeling: the spirit then lived in a state of pre-reflective, elemental immediacy and unity with nature, and expressed itself preeminently in art. The spirit was ‘in itself’ (an sich) and had not yet experienced the division of mind and body. The second era, lasting to the present time, was that of Christianity-a period of reflection in which the spirit turns toward itself, moving from natural, sensual immediacy to abstraction and universality. In spite of all changes and reversals, since the advent of Christ humanity has essentially remained at the level of the spirit ‘for itself’ (fur sich). The supreme and final work of the spirit in this phase is Hegel’s own philosophy, the absolutization of thought and universality at the expense of individual existence, will, and matter. Throughout the Christian centuries humanity has been in a state of intolerable duality, in which God and the temporal world, spirit and matter; action and thought have been opposed to each other as antagonistic values.” – Leszek Kolakowski, 1978, Main Currents of Marxism, pg 85.
Now compare that passage to this one:
“Cieszkowski brought to Hegelianism a new dialectic of history, a new variant of the three ages of man. The first age, the age of antiquity, was, for some reason, the age of emotion, the epoch of pure feeling, of no reflective thought, of elemental immediacy and unity with nature. The ‘spirit’ was ‘in itself’ (an sich). The second age of mankind, the Christian era, stretching from the birth of Jesus to the death of the great Hegel, was the age of thought, of reflection, in which the ‘spirit’ moved ‘toward itself’, in the direction of abstraction and universality. But Christianity, the age of thought, was also an era of intolerable duality, of man separated from God, of spirit separated from matter, and thought from action. Finally, the third and culminating age, the coming age, heralded by Count Cieszkowski, was to be the age of action. In short, the third post-Hegelian age would be an age of practical action, in which the thought of both Christianity and of Hegel would be transcended and embodied into an act of will, a final revolution to overthrow and transcend existing institutions.” – Murray Rothbard, History of Economic Thought, Volume 2, 1995, pg 360.
Hmmm….