Thursday, August 18, 2016

The new voodoo

Scott Sumner sums up contemporary stimulus proposals well
...Old hydraulic Keynesianism from the 1960s was already a pretty implausible model. But what's happened since 2009 involves not just one, but at least five new types of voodoo: 
1. The claim that artificial attempts to force wages higher will boost employment, by boosting AD.

2. The claim that extended unemployment benefits---paying people not to work---will lead to more employment, by boosting AD.

3. The claim that more government spending can actually reduce the budget deficit, by boosting AD and growth. Note that in the simple Keynesian model, even with no crowding out, monetary offset, etc., this is impossible.

4. More aggregate demand will lead to higher productivity. In the old Keynesian model, more AD boosted growth by increasing employment, not productivity.

5. Fiscal stimulus can boost AD when not at the zero bound, because . . . ?

In all five cases there is almost no theoretical or empirical support for the new voodoo claims, and lots of evidence against. There were 5 attempts to push wages higher in the 1930s, and all 5 failed to spur recovery. Job creation sped up when the extended UI benefits ended at the beginning of 2014, contrary to the prediction of Keynesians. The austerity of 2013 failed to slow growth, contrary to the predictions of Keynesians. Britain had perhaps the biggest budget deficits of any major economy during the Great Recession, job growth has been robust, and yet productivity is now actually lower than in the 4th quarter of 2007.


  1. Regarding the 1930s, the consensus is that Eggertsson clearly won the debate with Cole & Ohanian concerning the New Deal policies.


    1. I don't know what "consensus" you're talking about, beyond Eggertsson, and perhaps Delong and Krugman.

      Eggertson in this paper pursues the idea that in new keynesian models everything is "topsy turvy" so that reducing productivity is good for the economy -- something we're not hearing so loudly in the push for "infrastructure" stimulus by the way, which if its advocates believed their own models would have the opposite effect.

      For an analysis of all the problems in this kind of model, see "the new keynesian liquidity trap" here

      also Johnannes Wieland here

  2. I was expecting a post on Neo-Fisherians

  3. "Job creation sped up when the extended UI benefits ended at the beginning of 2014, contrary to the prediction of Keynesians."

    Scott Sumner keeps saying this, but it isn't supported by data. A large portion of the increase appears to be due to the ACA going into effect (increased hires in health care). The increase also appears as a break in the trend in health care job openings, which supports the idea of increased hiring due to the ACA:


      Non farm payroll growth from 2012 to 2014 averaged about 1.6 to 1.7% per year. From 2014 to 2016 it averaged about 1.8 to 1.9% per year.

      That extra 0.2% represents:

      0.2% x total payroll employment of around 130 million = 260,000

      Healthcare employment is up over 1 million from 2014-2016

    2. I don't think Scott was making the mistake of establishing causality. He just noticed a trend in the data - job growth did pick up at the beginning of 2014 when both extended unemployment insurance ended and the ACA went into effect.

      Looking at health care employment in isolation:

      It's up over 1 million employees since 2014. In fact, you would never know there were recessions in 1991, 2000, or 2008 in this graph.

    3. I believe Scott is referencing the correlation between employment in specific areas that cut UE benefits earlier than others.

    4. Something along these lines

  4. For those wondering what AD is, it is Agregate Demand... or the equation is AD = C+I+G+(Nx.

    1. That is the equation for nominal GDP.

      "GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X – M)."

      "Y = C + I + G + (X − M)"

      Aggregate demand is defined this way:

      "AD = C + I + G + (X − M)"


      "In Keynesian economics, not all of gross private domestic investment counts as part of aggregate demand. Much or most of the investment in inventories can be due to a short-fall in demand (unplanned inventory accumulation or general over-production). The Keynesian model forecasts a decrease in national output and income when there is unplanned investment. (Inventory accumulation would correspond to an excess supply of products; in the National Income and Product Accounts, it is treated as a purchase by its producer.) Thus, only the planned or intended or desired part of investment."

      And so while inventory changes count as part of nominal GDP, they are not treated as part of aggregate demand in Keynesian economic models.

  5. I think it's actually "After Death."

  6. "Scott Sumner keeps saying this [job creation sped up when the extended UI benefits ended], but it isn't supported by data..."

    I also feel the need to speak up, even though I despite Keynes and am in general a free-market economist. But it really chaps my hide when I see economists (or others) trying to cut poor people off at the knees rather than focus on those who are abusing the law to live high on the hog first.

    (When I first got involved with the libertarian party in 1990, my favorite T-Shirt saying was "If we get the rich off of welfare the poor won't need it." Alas, most in the LP seem to have forgotten that, and figure might as well go after the low-hanging fruit [the poor] first, no matter how much misery it causes.)

    Back en pointe: For many people the choice is unemployment or disease/death, as the only jobs available are minimum wage AND involve a lot of transporation cost (something UI detractors love to forget). And moving closer to the job often means, amongst many other quality of life issues, a greatly increased chance of being maimed or killed.

    The money that goes to UI is trivial compared to the total government spending (especially military-industrial complex), and until things change (radically reduced military spending) it will be impossible for their to be anough good jobs to go around, whether you free up the money from UI or not.

    Remember one very important thing that economists (many of whom life off the government, directly or indirectly!) love to forget: the governmen can sell off assets to pay for (for instance) UI, whereas an individual has no way of selling off his share of publically-owned property.

    (I think that's yet another Noble-prize-worthy concept I've come up with, but not having any creditionals I won't hold my breath. But remember, you heard it here first [as far as I know].)

    1. Neal, you put your "Noble[sic]-prize-worthy concept" after your statement that moving closer to a job often means a "greatly increased chance of being maimed or killed"?

      I think you may be more likely to win. Darwin Award than a Nobel.

    2. At least he had the balls to post under his real name instead of a pseudonym. (I'm posting as Anonymous, but my name's Ryan by the way.)

      "For many people the choice is unemployment or disease/death, as the only jobs available are minimum wage AND involve a lot of transporation cost. And moving closer to the job often means, amongst many other quality of life issues, a greatly increased chance of being maimed or killed."

      I find this argument to be an incredible overreach. First off, if there's one thing I don't understand about modern society is how demonized the concept of labor has become. When I say labor I'm not talking what we're all doing sitting at a desk typing at a computer. I'm talking labor where you're required to sweat or work on a factory line. Somehow this becomes equated to disease and death.

      I also find the notion of not living in a nice expensive or middle-class neighborhood somehow equates to being killed as incredibly elitist and out of touch.

    3. Regardless of the name he or I used, the comments stand on their own. I, also named Ryan by the way, believe his comments were ridiculous. I highly doubt that the choice to take UI is a decision based on the chance of being "killed or maimed" due to some danger in the proximity of a job. The decision to take UI, or more accurately to continue to take it, rather than take employment is much more likely to be about being paid for doing nothing than being about personal physical security.

    4. An ad hominem attack typical of those who cower in anonymity (and even when pressed refuse to give more than their first name), refusing to address the main point but instead gleefully pouncing on typos and side issues in a vain attempt to prove their manhood.

      (This comment is directed at "The Donk".)

    5. That clearly wasn't just an ad hominem attack. The attack was directed at your ridiculous insinuation regarding taking UI benefits, which was couched in an insult/mockery. My "manhood" has nothing to do with my arguments and the only thing I "gleefully" pounced on was your ridiculous idea. If I was focused on your typos, I would have pointed all of them out, not just the one inside your boastful claim of having thought up some Nobel worthy idea. I believe your "main point" was that of poor people being cutoff at the knees and you used the criticisms of UI to bolster that point. It was your ridiculous defense against those criticisms which I attacked. Still not sure why my name, or manhood, has anything to do with this, but I note that that itself is an ad hominem attack on me. Care to further explain your "killed or maimed" idea any further?

    6. Reading Neal's post - you get the impression he has never seen a third world country before. Not even on television.

  7. The below is from a published paper from the Dallas Fed. They suggest that if the Fed buys mortgage-backed securities, that is anti-inflationray, due to the fiscal theory of the price level.

    “Inflation Is Not Always and Everywhere a Monetary Phenomenon” by Antonella Tutino and Carlos E.J.M. Zarazaga.

    “The fiscal theory of the price level argues that what’s true about hyperinflation is valid more generally: Fiscal policy can prevent inflation from rising or falling too much by backing all outstanding nominal government liabilities—interest bearing or not—with a stable level of expected future primary government surpluses. By formally incorporating fiscal policy in the analysis of price-level dynamics, the fiscal theory of the price level is better equipped than the conventional monetarist approach to explain why the recent large expansion of the money supply in the U.S. has not caused higher inflation.
 The (FTPL) theory implies that the quantitative easing programs, which created money to purchase mortgage-backed securities from the public, preserved price stability because that money is backed by the returns from real estate investments. Similarly, Germany restored price stability after its interwar hyperinflation with its real-estate-backed currency.”

  8. Well, I'm not sure it's completely unjustified voodoo:
    According to standard new keynesian models with credit constrained households targetted transfer to unemployed or other poor/credit constrained households can raise employment via higher AD(though ideally they shouldn't be directly related to the unemployment status to reduce the disincentives effects on flexible price/potential employment and output. See for example, figure 3 here,
    Can higher government spending boost productivity? Yes, in RBC models with search frictions in product markets, e.g here
    But no doubt the quantitative importance of these channels is much smaller than advocated by some vocal Keynesians.

  9. I’m pretty sure I know what’s behind Sumner’s fifth alleged voodoo item (the idea that fiscal stimulus can’t boost demand when interest is above zero): it’s his bizarre claim that central banks will always negate fiscal stimulus, ergo fiscal stimulus is useless. See this article by Sumner for more details:

    Well now, suppose the slow decline in interest rates over the last 20 years was reversed and we had significantly positive rates. And suppose there was excess unemployment. Why, given a bout of fiscal stimulus, would a central bank want to negate that stimulus? No reason at all, assuming the central bank agreed that some stimulus was in order.

  10. Can you check the spelling of Summner?

  11. So what's your solution? Flow more and more to the top .1%? You do a lot of criticizing but offer no plausible answers.


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