05 May 2014

Whether r < g or r > g, We Need Much Bigger Government

Capital & Interest, Krugman, Nick Rowe 5 Comments

I was toying with this idea but hadn’t had time to go document my claims. But now Nick Rowe is saying the same thing, so I’ll let him put his head out there. Anyway here’s the claim:

(1) A few months ago, Krugman was agreeing with Larry Summers that we were stuck in a period of secular stagnation. For various reasons, the market-clearing real rate of interest would be so low that we needed to either permanently boost (price) inflation and/or enact permanent fiscal stimulus programs in order to ensure full employment. Nick summarizes the problem as r < g. (2) Now with Piketty's book, Krugman et al. are agreeing that we are entering a period where r > g and it will only get worse over time. This shows why we need a worldwide tax on wealth.

OK kids: Fair or unfair? For sure claim (2) is right, but is it correct to characterize the worries over secular stagnation as “r < g"?

5 Responses to “Whether r < g or r > g, We Need Much Bigger Government”

  1. Scott Angell says:

    Brad DeLong has attempted to reconcile this – –


    I thought it was a neat article, anyway.

    • Major_Freedom says:

      Delong’s premises are wrong right off the bat. He writes:

      The first r, r1, is what Larry Summers is talking about when he talks about secular stagnation. When that r1 falls to a level equal to minus the rate of inflation, the economy is in big trouble. At that point, wealthholders would rather become coupon-clipping rentiers holding government bonds then invest in industry of any sort. Full employment can then be attained only via:

      A bubble that produces unrealistic and unsustainable expectations of the profits from investing in industry.

      The government borrowing money and buying stuff on a large scale.

      A higher rate of trend inflation that relaxes the zero lower bound constraint on safe government debt interest rates.

      Delong is omitting falling wage rates and prices. No, prices are not sticky forever, they can, and in the absence of government meddling do, fall towards clearing prices. It is simply not true that only government can bring about full employment. Indeed, its full employment directed actions tend to be transitory and self-reversing in the longer run anyway.

      When you cannot think outside the narrow Keynesian box, then it is only natural that you will fail to notice non-Keynesian phenomena.

  2. Major_Freedom says:

    Interestingly, this “rg” conflicting message coming from the anti-capitalist camp these days is not new. The same thing happened during the 1930s as well.

    Back then, the Marxists and the “new” economics school, Keynesiansism, sparred with each other over the rate of profit. The Marxists of course felt profits were “too high”. This was the dominant view right before the Keynesian revolution. The prevailing belief then, much like today, was that capitalists were making too high of a profit relative to wages. We can summarize this as “r>g”. In the absence of government guns, capitalism run free would result in ever declining wages as profits take up more and more of aggregate income. Above all else, the anti-capitalists believed government must step in, to force profits downward.

    When Keynes arrived on the scene, he faced this dominant view of too high a rate of profit, but he thought something similar to the opposite was the real problem of capitalism. By a series of confusions piled on top of confusions, Keynes believed that capitalism was marred not by profits being too high relative to wages, but rather that profits in capitalism are prone to be too low absolutely (which Keynes and his followers took to be 2% or lower). This was because of an alleged tendency for savings to “leak out” of capitalist economies, thus reducing aggregate demand, and thus allegedly causing employment. This was held to cause more savings leakage, and further decreases in spending, and further increases in unemployment. Keynes falsely believed that even if, for whatever (miraculous) reason, investment picked up, it would not lift the economy out of depression, would drive it further into a deeper depression as, allegedly, capital goods prices rise when there is increased investment. The government doctor and its deficit making ability is supposed to be able to raise the rate of profit, which then stimulates investment and restores employment. Above all else, the anti-capitalists believed the government must step in, to force profits upward.

    Fast forward to today, and we have a Marxist author resurrecting the “profits are too high” meme, along with analytics and historical data (not capitalism data, by the way). Government must step in to force profits downward, as the government accelerated its forcing of profits upward since 2008, and yet the economy isn’t booming. The author is taking this opportunity to prove Marx right about capitalism. Profits are too high relative to wages in capitalism. He’s found a market because many people are giving up on capitalism after running out of ideas on how the government can solve their problems.

  3. Innocent says:

    Okay, and I do not have the math to back this up so forgive me. But every time a technological revolution has hit wealth has pooled in the hands of a few and then been redistributed naturally over time. For instance in the mid – late 1800’s the Rail Barons came to be. They lasted about 30 years before things blew up.

    Then at the turn of the century we had the industrial revolution which lasted from 1910 to about the early 1930’s which then blew up on them.

    Now we have had a new revolution combined with MAJOR globalization/industrialization… Well someone is going to get rich off of this… Honestly between the 1940’s and the 1980’s what was the last technology that had created a Steve Jobs, or a Bill Gates? I suppose a few people in the Movie’s Industry. But other than that there really was nothing.

    And the tech boom is not dead yet. Though it feels like it has been played out a little bit. We will see. Some people say biotech is the next big thing. That could create some powerful new players as well, or energy possibly.

    Anyway the point is that before Computers you needed middle men to handle management and direct orders etc and so on. With the introduction of computers you no longer REALLY needed that. Computers have taken over most of the functionality of the middle men. TO be honest Programmers have started to become the new middle men. It will take a generation or two for the new economy to really embrace this and skill sets to be moved over to handle this new form of engineering. It is starting to play out. Heck look online and it is hard to find a starting position for a programmer for less than $50,000 a year.

    The point is that the economy is restructuring. As it often does when new technology comes along. Those that adapt can do well, those that can’t become unemployed. Look no further than the weavers revolution to see what happens.

    In the end wealth will be redistributed as the new economy figures itself out and competition for the new worker grows and more people become the new worker. The middle class will come back, the moguls will eventually die. The Gini coefficient will become more normal once again. All that is needed is time.

    In the mean time we will have people suggest that we need to take the wealth of others in order to …. and you can fill in the blank with whatever it is. What we really need to do is make sure we do not have additional freedom sacrificed in the name of creating equality. Often times the first thing to go is a barring of the gates toward wealth. This does not help take the wealth away from those that have it rather it makes it more difficult for others to grow and take part of that path.

  4. guest says:

    consultingbyrpm blog tag piketty

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