Paul Krugman, check your thoughts and your sources! In a blog post titled More Thoughts on Weaponized Keynesianism, Krugman wrote:
Economics, as I say often, is not a morality play. As far as creating aggregate demand is concerned, spending is spending – public spending is as good as but also no better than private spending, spending on bombs is as good as spending on public parks.Economics is not a morality play but spending on bombs is NOT "as good as" spending on parks. In a comment, reader valuethinker from London pointed out that the lowest multiplier estimate for stimulus spending was for defense manufacture. This is not a trivial side issue but the core of the problem. Spending on the wrong things ultimately defeats the purpose of Keynesian stimulus. Keynes knew this. It's a shame Krugman doesn't know his Keynes.
In his post, Krugman also cited "the Kalecki point that admitting that the government can create jobs undermines demands that policies be framed to cater to all-important business confidence." Krugman linked to Rortybomb who linked to MRZine for the Kalecki paper. In that paper, Kalecki had more to say that is germane to Krugman's argument that "spending on bombs is as good as spending on public parks":
One of the important functions of fascism, as typified by the Nazi system, was to remove capitalist objections to full employment.
The dislike of government spending policy as such is overcome under fascism by the fact that the state machinery is under the direct control of a partnership of big business with fascism. The necessity for the myth of 'sound finance', which served to prevent the government from offsetting a confidence crisis by spending, is removed. In a democracy, one does not know what the next government will be like. Under fascism there is no next government.
The dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditure on armaments. Finally, 'discipline in the factories' and 'political stability' under full employment are maintained by the 'new order', which ranges from suppression of the trade unions to the concentration camp. Political pressure replaces the economic pressure of unemployment.
So, yes, "spending on bombs is as good as spending on public parks" -- even better if you're a fascist! By the way, Professor Krugman. You still haven't replied to my earlier letter.
Why shouldn't economics be a morality play anyway? That's a key critique of modern mainstream macro - it only cares about total output and nothing for the quality of those outputs or their distribution. Economics without its philosophy - without its morality - is disingenuous. Even those who claim a 'value-free' economics are implicitly endorsing the 'maximization' morality which underpins our failed neoliberalism.
ReplyDeleteKrugman is right to say that economics is not a morality play – at least in the sense that the decision as to whether more bombs rather than butter is a decision for politicians and the democratic process, not a decision for economists. I.e. the job of economics is to maximise output within environmental constrains REGARDLESS of whether the politicians and the electorate decide to have a large military or a small one.
ReplyDeleteAs to the difference in the multiplier that allegedly exists as between military and other forms of spending, this is irrelevant. Reason is that a small multiplier is no problem in the sense that it costs nothing to have the government / central bank machine print more money and spend it. I.e. if politicians and the democratic process want more of some product which involves no multiplier at all, no problem: it just means the government / central bank machine has to print more money and spend it than would be case with a “high multiplier” product.
The multiplier is irrelevant in determining the number of jobs? New frontiers in arithmetic! I suppose the denominator is equally irrelevant in a fraction.
ReplyDeleteThe multiplier is relevant and if defense spending has a large marginal propensity to import, then its multiplier will be smaller. Very relevant! But remember that Paul was responding to folks like Jon Kyl who think military spending is expansionary while increases in domestic spending are somehow contradictory. At least Paul has the signs right!
ReplyDeleteI want to stress again that I realize Krugman's heart is in the right place and his argument is against folks like John Kyl. But he is employing the "loser liberal" strategy of conceding the framing of the issue to the assholes and punching a few hippies along the way to demonstrate his "even-handedness". We don't need that kind of handicapping.
ReplyDeleteThe "not a morality play" argument has a context which Krugman didn't really spell out. It is a commonplace response to the Andrew Mellon point of view expressed in his famous "liquidationist" advice to Hoover. From Hoover's Memoirs, via delong: (http://delong.typepad.com/delong_economics_only/2007/02/why_oh_why_cant.html)
ReplyDelete"the “leave it alone liquidationists” headed by [my] Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”..."
"Not a morality play" is generally a response to the 'live a more moral life' part of this argument. We aren't having a recession because the public at large was being immoral. And the recession won't mete out condign punishment for whatever behavior led to the recession.
I don't think Krugman meant to say weapons lack any moral issues. And he has had a lot to say about the morality of the bankers and Very Serious People who are standing in the way of a recovery in employment.
"I don't think Krugman meant to say weapons lack any moral issues."
ReplyDeleteWhatever Krugman may have meant to say, what he said was "Economics, as I say often, is not a morality play. As far as creating aggregate demand is concerned, spending is spending – public spending is as good as but also no better than private spending, spending on bombs is as good as spending on public parks." And that's what I am responding to. I hate it when people read my mind and reply to what they think I meant to say instead of what I said. I give the same courtesy to others' ability to express themselves as I expect for myself.
Sandwichman, I gave a very good reason for thinking that “multiplier is irrelevant in determining the number of jobs”. Since you don’t seem to understand it, I’ll repeat the explanation, in more detail.
ReplyDeleteFirst, for a bout of stimulus (or “injection” to use economics jargon) of GIVEN SIZE, then obviously the multiplier determines the number of jobs created. That’s elementary economics.
However, if the multiplier is on the small size, that shouldn’t matter because the injection or initial stimulus can be made bigger. That would probably work, but a possible reason it might not is as follows.
If one goes for the standard Keynsian “borrow and spend” policy, the deflationary effect of the borrowing may exceed the stimulatory effect of the spending. Put another way, “crowding out” can smother the stimulatory effect. However, even that problem is easily solved.
As Keynes, Milton Friedman and numerous other economists have pointed out, deficits do not necessarily have to be funded by borrowing: i.e. deficits can perfectly well accumulate as extra monetary base rather than as extra debt. Put another way, deficits can be funded by freshly printed money. In that case, there is no crowding out. That was why I specifically referred in my first comment above to the “print” option rather than the “borrow” option.
Conclusion: if the multiplier is on the small size, that’s not a problem: just do a bit of “print and spend”.
Yes, Ralph. And if wishes were horses, beggars would ride. Multipliers don't matter in an alternative universe where policy makers have no inhibition about printing money therefore multipliers don't matter. I understand that much. Reminds me of the equally plausible policy option of "Comes the revolution... (fill in the blank)."
ReplyDelete