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Tuesday, February 22, 2011

Accidental Keynesians

Mike Kimel posted the following graph (see below) at the Presimatrics Blog (reposted at A.B.) by way of a 2nd order critique of Tyler Cowan's e-book THE GREAT STAGNATION, and first order critique of commentary by Cowan's blogging partner Alex Tabarrok.

The graph shows, instead of a data trace, two types of behavior.  The gray bands indicate times when government policies, whether by design or not, were consistent with a Keynesian economic approach.  The turquoise bands indicate times when government policies were inconsistent with a Keynesian approach.

Let's review what this means.  Here's Mike:

The basic Keynesian idea is this: economic downturns (and meltdowns) can occur and/or be prolonged and worsened when the private sector becomes worried and cuts back. In those circumstances, the government should step in and buy things, lots and lots of things, replacing the shrunken private sector demand. Once the economy picks up again, the government should cut back on its spending and start saving up money, first to pay for its recent spending bout and second to have cash in hand to cover its next necessary spending bout.

Put another way – a government thinking along Keynesian lines will tend to run a deficit when real private sector spending falls below some prior highwater mark. It will run a surplus in years real spending exceeds prior real private sector spending. There may, of course, be exceptions in any given year, but a Keynesian government will generally follow that sort of behavior. A government that runs a deficit when real private sector spending is rising, or runs a surplus when real private sector spending is falling, and behaves this way in general is most definitely not operating under Keynesian principles. 

And here's his graph. (Click to enlarge.)

Remember - gray means Keynesian, turquoise means non-Keynesian.   It's worth emphasizing that this chart says little to nothing about the intent of an administration to follow Keynes, or not.  (Though not following appears to be considerably more deliberate than following - at least since the '70's.*)   It only reflects the actual results, as described in Mike's text above.  For example, I have no reason to believe that Ike was particularly Keynesian, or that Bush Sr. had a short-term economic epiphany in 1991.  Nor, for that matter, that the B. Hoover Obama administration has decided to "step in and buy things, lots and lots of things, replacing the shrunken private sector demand."

But, irrespective of intent, it's results that count - and that is what is being indicated here.

Given all that, let's have another look at the graph, in the context of  THE GREAT STAGNATION, which was Mike's point in presenting it.  What we see is that from the beginning of FDR's administration (in fairness, from the previous year, 1931) until (an arbitrarily selected) 1975 Keynesian policies were followed 34 of 44 years, or 77% of the time.  From 1976 through 2009 (end of the data set) non-Keynesian policies were followed  25 out of 33 years, or 76% of the time.

The symmetry is pretty remarkable, but also pretty misleading.  Pick a different inflection point, and the ratios will skew.  More importantly, one thing this approach does not address is the magnitude of the Keynesian policy.  As the last couple of years have shown, half-hearted and underfunded stimulus might help a bit, but it's not going to get at the core of an aggregate demand shortfall problem.   (And, sadly, plays into the hands of the Keynes denialists like Tabarrok.)  Also, deficits resulting from reduced revenues - whether induced by tax cuts or depressed tax reciepts in a downturn - have little to no stimulative power.  Further, as alluded to above, wandering across the border into Keynesian territory for a single year - as Poppy did in '91 - means nothing.  He was running serial deficits anyway, and the recession incidentally provided the other requirement: that the private sectors cut back.

Mike's point is that "Tabarrok is wrong – wrong that Keynesian economics hasn’t been tried, and wrong that it hasn’t worked. And Cowen, it turns out, is wrong about exactly the same thing in his book."

My point is - hey look - here is another example of something that changed at the end of the post WW II golden age, and led into the Great Stagnation.  The fact that the Keynesian period included the golden age, and the non-Keynesian period defines The Great Stagnation is, of course, a mere coincidence.

Afterthought:  Tabarrak's post (linked above) is sloppy, incoherent, and obviously ideologically motivated.  In all honesty, it strikes me as idiotic bullshit motivated by malicious intent.  Posts by Scott Sumner in comments are - seriously - even worse.  The Krugman derangement syndrome Sumner displays is really quite depressing.   And these guys are highly respected economists.

* Afterthougth 2:  OTOH, the beginning of the New Deal was less Keynesian than a scattershot approach to something - anything - that might help.  Programs like the CCC and WPA were probably motivated more by social than economic considerations.  (I'm speculating here - though I'm sure this answer is available, I don't have time at the moment to go find it.)  At any rate, Keynes' General Theory wasn't published until 1936, and I'm pretty sure the FDR administration did not  have an inside track to Keynes' unpublished thoughts in 1932.


BadTux said...

Keep on with the graphs. I already knew most of this stuff, but the pictures make it so ridiculously easy to see that only an idiot could not admit that our country simply worked better prior to Reaganism. Zombie Reagan still haunts our country and until the majority of people wake up to the fact that, well, zombies aren't good for you, things aren't going to get any better. And sad to say, the only thing that'll change the average free-lunch-lovin' American's mind about "gubmint evil, low taxes gud" is complete and utter national disaster... and even there, I have my doubts.

Or as you might say: WASF.

- Badtux the Ideologue-baiting Penguin

cactus said...

" OTOH, the beginning of the New Deal was less Keynesian than a scattershot approach to something - anything - that might help. Programs like the CCC and WPA were probably motivated more by social than economic considerations. (I'm speculating here - though I'm sure this answer is available, I don't have time at the moment to go find it.) At any rate, Keynes' General Theory wasn't published until 1936, and I'm pretty sure the FDR administration did not have an inside track to Keynes' unpublished thoughts in 1932."

It is true that FDR in 1934 wouldn't call himself by a name that wouldn't have a meaning until some years later, but that doesn't mean he wasn't more or less trying to follow a policy that would be given that name. And the fact that there were social considerations (e.g., preventing insurrection) doesn't mean that the policies weren't, in fact, just about what Keynes would have suggested some years latear.

cactus said...

Sorry... I have to get around to changing my google account. "cactus" is my old pen-name.

Mike Kimel

BadTux said...

And one thing I will point out is that while Keynes had not yet published his General Theory, he had already worked out many of its details and was fervently attempting to contact any policy maker, anywhere, with what he had found. None of them really paid him much attention -- FDR in 1934, for example, complained after Keynes had wheedled a meeting with him that Keynes seemed more a mathematician than an economist and that he couldn't follow a thing the man had told him -- but the ideas were starting to float around out there even if not yet deemed credible.

Still, 1937 is proof enough that FDR was no Keynesian, even if he'd inadvertently been behaving like one...


Octopus said...

A minor but important historical point: Sweden was the first country to emerge from the Great Depression because it fully embraced Keynes. Germany was the second to emerge ... on account of its military buildup.

Unfortunately, when the only high paying wage jobs left are in the military-industrial sector, while the rest of the manufacturing base has gone offshore, it tells you something about the future course and direction of a nation ... unless we can break the hold of exceptionalism.

The Arthurian said...

Hey, Jazz. This is the 2nd time I ended up at this post by following your link. The repetition helps. Now I know why I had trouble with the ideas the first time.

At the Kimel site, in one of his comments he says:
What Keynes called for was deficits when the private sector cut back, and surpluses at other times. The fact that the government started running non-stop deficits means that by the very definition of Keynesian economics, it wasn’t following Keynesian policies.
In my 30+ years of hobbyist-level economics, this is only the second time I have seen someone say that. The first time was in some long-lost book, where the guy referred to a quote from a Keynes himself in a statement in the New York Times, from 1933 or 1934.

In the 1960s policymakers considered themselves Keynesian, but they forgot all about the balancing-the-budget part of it, in favor of "full-employment" budgets, under which the budget "would be balanced" if only the economy was running at full employment. An outgrowth of Phillips curve worship, perhaps.

I resolve the discrepancy for myself by saying Keynes was not "Keynesian" in the popular sense of the word. Anyway, I am not used to thinking of balancing the budget as a "Keynesian" concept.