Is Obama a Keynesian?

Everybody is linking to this great video questioning Obama's Keynesian "heritage" from the March for Sanity. Worth another view.

Posner becomes a Keynesian

Richard Posner writes in the New Republic about how he became a Keynesian. Worth reading, despite his confusion over the difference between savings and investment. Perhaps the problem is Posner's inability to use the word equilibrium condition. For Keynes point was that savings equals investment in equilibrium and that changes in income bring this about. Without this the article is confusing about passive and active investment and so on.

I need to write more about the contribution of Keynes to understanding this crisis.

Dark Ages of Macro

Krugman has a piece on the Dark Age of Macro that must be linked to. So here goes.

It is partly a comment on John Cochrane's essay. The critics focus on John for this comment:

First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both¹ . This is just accounting, and does not need a complex argument about “crowding out.”

But if you read the whole essay you see that there is a lot of very good stuff in here. Including a very important diagnosis of what the real cause of the crisis -- essentially an excess demand for US Govt Debt (bonds and money). People have fled private debt for public debt because of a sudden explosion of risk aversion. In this setting aggregate demand is low precisely because people want to hold more public debt. Cochrane argues that fiscal stimulus potentially could work in this situation, but he points out that once people's preference return to normal we are going to have a lot more public debt outstanding than we can handle. So his preference is for policies that can be reversed when needed:

In sum, there is a plausible diagnosis and a logically consistent argument under which fiscal stimulus could help: We are experiencing a strong portfolio and precautionary demand for government debt, along with a credit crunch. People want to hold less private debt and they want to save, and they want to hold Treasuries, money, or government-guaranteed debt. However, this demand can be satisfied in far greater quantity, much more quickly, much more reversibly, and without the danger of a fiscal collapse and inflation down the road, if the Fed and Treasury were simply to expand their operations of issuing treasury debt and money in exchange for high-quality private debt and especially new securitized debt.

This is a much more subtle argument than the first quoted paragraph suggests. It shows that one should always read the whole essay.

Fiscal Stimulus

Paul Krugman is annoyed at the opposition to fiscal stimulus plans that are couched in bad macro. I have to agree with him. As he notes:

There are certainly legitimate arguments against spending-based fiscal stimulus. You can worry about the burden of debt; you can argue that the government will spend money so badly that the jobs created are not worth having; and I’m sure there are other arguments worth taking seriously.

What’s been disturbing, however, is the parade of first-rate economists making totally non-serious arguments against fiscal expansion. You’ve got John Taylor arguing for permanent tax cuts as a response to temporary shocks, apparently oblivious to the logical problems. You’ve got John Cochrane going all Andrew-Mellon-liquidationist on us. You’ve got Eugene Fama reinventing the long-discredited Treasury View. You’ve got Gary Becker apparently unaware that monetary policy has hit the zero lower bound. And you’ve got Greg Mankiw — well, I don’t know what Greg actually believes, he just seems to be approvingly linking to anyone opposed to stimulus, regardless of the quality of their argument.

It seems very weird that such excellent economists would make such bad arguments. Why not just argue political economy or corruption or debt. But to argue that fiscal stimulus cannot have an impact on aggregate employment in a deep recession when monetary policy is tapped out seems bizarre to me.

Mark Thoma has had some good columns on this too, and Brad DeLong has a nice web paper.

Fiscal Stimulus

In the NYTimes David Brooks discusses the Romer's research showing that monetary policy, not fiscal policy, is the preferred solution to recessions. This is a consistent theme in recent discussion. But what this discussion all ignores is Leijonhufvud's corridor hypothesis, which I discussed in an earlier post. The key point is that the economy works differently when inside the corridor of normal behavior. Then neoclassical relations hold. In depression-like circumstances, on the other hand, we are outside the corridor. It is not at all clear that relationships that hold inside the corridor hold outside as well.

The point of Keynesian economics is thus really about Depression conditions. Then monetary policy is relatively useless because businesses fail to invest not because of the cost of capital but because of fear of the future. It is crucial to keep the corridor analysis in mind these days. Ignoring it is ignoring the Lucas Critique.