Heather Long reports that the White House economists have no clue about the history of U.S. fiscal policy:
President Trump’s policies are driving an economic turnaround that puts him in the company of transformative presidents such as John F. Kennedy and Ronald Reagan, White House economists said Wednesday as they unveiled their first “Economic Report of the President.” The report presents a highly optimistic view of the economy’s current condition and future course, with growth predictions that exceed most nonpartisan economists’ expectations. Economists also caution the White House’s efforts to juice growth could cause the economy to overheat and then careen into a downturn.
Brad DeLong asks whether his latest on fiscal policy and long-term growth belongs in the next edition of Martha Olney's and his macroeconomics textbook? While I say it should, permit me to quote the relevant passages after I inform these clueless White House economists about fiscal policy during the 1960’s and under Reagan as I noted over at Brad’s place:
We did get that 1964 tax cut right after Kennedy died and we did ramp up defense spending for Vietnam. In December 1965 Johnson's CEA had the good sense to tell him that we had gone overboard with fiscal stimulus. Alas we got the 1966 Credit Crunch anyway followed by an acceleration of inflation when the FED backed off on its restraint. Reagan gave us a similar fiscal policy but the Volcker FED did not back off its tight monetary policy so we got the mother of all crowding out - high real interest rates for years and a massive currency appreciation. Glad to see that Trump's CEA has compared this fiscal fiasco to the previous mistakes. Oh wait - Kevin Hassett thinks this is good fiscal policy. It seems the current CEA is as stupid as the President it advises!
OK – now that I’m done with my rant and little history lesson, let’s hear from Brad:
In late 2017 and early 2018 the Trump administration and the Republican congressional caucuses pushed through a combined tax cut and a relaxation of spending caps to the tune of increasing the federal government budget deficit by about 1.4% of GDP. These policy changes were intended to be permanent.
Not the consensus but the center-of-gravity analysis by informed opinion in the economics profession of the effects on long-run growth of such a permanent change in fiscal policy would have made the following points:
1. The U.S. economy at the start of 2018 was roughly at full employment, or at least the Federal Reserve believed that it was at full employment and was taking active steps to keep spending from rising faster than their estimate of the trend growth of the economy, so a long-run Solow growth model analysis would be appropriate.
2. The economy's savings-investment effort rate, s, has two parts: private and government saving: s=sp+sgs=sp+sg.
3. The private savings rate spsp is very hard to move by changes in economic policy. Policy changes that raise rates of return on capital—interest and profit rates—both make it more profitable to save and invest more but also make us richer in the future, and so diminish the need to save and invest more. These two roughly offset.
4. Therefore, when the economy is at full employment, changes in overall savings are driven by changes in the government contribution: Δs=ΔsgΔs=Δsg.
5. And an increase in the deficit is a reduction in the government savings rate.
Brad continues using the Solow growth model to demonstrate how the latest fiscal fiasco would lead to less capital per worker over time reducing steady state output, which is what we witnessed in the 1980’s. We have been asking the same question since 1981 – how can anyone argue that a fall in national savings is good for long-term growth? We still have not received a coherent answer.
10 comments:
pgl,
But rational expectations economists believe in Ricardian equivalence, which means that a higher deficit will lead to a higher savings rate as all those rationally expecting agents realize their will need to be a later tax increase to cover all those extra interest payments on the debt, so the ratexing agents will squirrel away their income into interest paying bonds to pay off those future higher taxes.
Why the savings rate went down instead of up in response to Reagan's higher deficits remains a mystery, but not one discussed at all by all those ratex accepting economists, such as Bob Hall and Tom Sargent in the latest JEP praising Milton Friedman for his wonderful speech a half century ago and how this led to ratex being the working assumption of all right-minded macreconomists.
Barkley,
That is because all economists are bastards -- except us.
Barkley - we can agree that Barro would have predicted that the 1981 ta cut would not have lower the national savings rate. We also know that national savings did fall in the early 1980's. I guess there is some explanation for this fact. But note the Barro view of the world still does not address DeLong's or my query.
It is interesting that Greg Mankiw's first macroeconomic textbook laid out very nicely the story I have suggested. Of course one has to wonder why he supported Bush43's tax cuts. At least he was not so keen on Trump's fiscal policy.
BTW - while I realize that Rational Expectations has its issues, the real question re the 1980's was how did alleged rational agents square the primary deficits from the 1981 tax cut combined with the jump in defense spending. One thesis would be that Reagan wanted to eventually starve the beast (he never did) and the other thesis being that those payroll tax increases in 1983 were to pay for the cuts in taxes for the rich rather than prefund our Social Security benefits. Either way the Republicans are intellectual bastards (thanks Sandwichman) but not us!
Fiscal policy and the Humpty Dumpty Fallacy
Comment on ProGrowthLiberal on ‘A Kennedy-Reagan-Trump Fiscal Policy?’
Economists think since the Classicals that saving and investment are two sides of the same coin. And since investment is good for growth, saving here and now makes us richer in the future. According to Adam Smith, the saver/capitalist is the true hero of wealth creation.
Brad deLong updates the story as follows: “The economy’s savings-investment effort rate, s, has two parts: private and government saving: s=sp+sgs=sp+sg. The private savings rate spsp is very hard to move by changes in economic policy. Policy changes that raise rates of return on capital ― interest and profit rates ― both make it more profitable to save and invest more but also make us richer in the future, and so diminish the need to save and invest more.”
Note that the saving-investment link is hardwired in the economist’s brain. Keynes put it thus: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)
With regard to the currently increasing government deficit this makes the representative economist wonder: “We have been asking the same question since 1981 ― how can anyone argue that a fall in national savings is good for long-term growth? We still have not received a coherent answer.”
The coherent answer is that economists get the relationship between saving and investment wrong since Adam Smith.
To make matters short, the axiomatically correct relationships are given here without further explanation.#1 It holds, with Qm monetary profit/loss, Sm monetary saving/dissaving, I investment expenditures, G government spending, T taxes:
(i) Qm=−Sm in the elementary production-consumption economy,
(ii) Qm=I−Sm in the elementary investment economy,
(iii) Qm=(G−T)+I−Sm in the investment economy with government deficit/surplus.
The point to grasp is that there is NO such thing as an equality/identity/equilibrium of household/government sector saving and business sector investment, and NEVER was, and NEVER will be.
According to (i) household sector saving produces a loss in the business sector and according to (iii) a government sector deficit produces a profit in the business sector. Investment I is a variable that moves INDEPENDENTLY from both private and public saving/dissaving.
Where, then, does the notorious identity/equality of saving/investment come from?
Let us take equation (ii) and play a semantic shell game. Enter Humpty Dumpty who introduces a redundant definition by saying that profit may be called “saving of the business sector” and that this “saving” can be added up with saving of the household sector to “total saving” Σ thus
(a) Σ≡Qm+Sm and now (ii) is rewritten
(b) Qm+Sm=I and then, hey presto,
(c) Σ≡I that is, “total saving” is “by definition” identical to investment or in the usual sloppy parlance “saving equals investment” which obviously contradicts (ii) and ― strangely enough ― makes profit invisible.
This methodological idiocy is at the bottom of all I=S/IS-LM models and Post Keynesian economics in general.#2
So, the coherent answer to the question why a fall in national savings could be good for long-term growth is that it boosts profit. The representative economist never got this because the profit theory is false since Smith/Ricardo.#3 This means that economic policy guidance in general, and fiscal policy in particular, NEVER had sound scientific foundations.
Egmont Kakarot-Handtke
#1 For details of the big picture see cross-references Refutation of I=S
http://axecorg.blogspot.de/2015/01/is-cross-references.html
#2 Why Post Keynesianism Is Not Yet a Science
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1966438
#3 Ricardo, too, got profit theory wrong. Sad!
https://axecorg.blogspot.de/2018/02/ricardo-too-got-profit-theory-wrong-sad.html
Capitalism is a debt based ponzi scheme of the hebrews. It goes back to ancient times. Smith just existed as a global agent to sell it to whites, who are as much as slaves as blacks.A house slave I would say.
Forget Keynes
Comment on Asad Zaman on ‘Understanding Macro: The Great Depression’
There is political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.
Political economics has produced NOTHING of scientific value in the last 200+ years. This is the track record: provably false
• profit theory, since 200+ years,
• Walrasian microfoundations (including equilibrium), since 140+ years,
• Keynesian macrofoundations (including I=S/IS-LM), since 80+ years.
Heterodoxy claims that Orthodoxy from Walras/Marshall to DSGE is false. This, of course, is true. However, Heterodoxy claims also that Keynesian economics is a valid replacement for Orthodoxy. This is provably false. Keynesianism, too, is proto-scientific junk.#1
Asad Zaman argues: “Lord John Maynard Keynes invented the entire field of macroeconomics in response to the Great Depression in 1929, which could not be understood according to economic theories dominant until then.”
Keynes, too, was an incompetent scientist and if there ever was a political agenda pusher then he. Keynes saw the necessity of a paradigm shift but he messed up the move from microfoundations to macrofoundations.
Fact is: Walrasianism, Keynesianism, Marxianism, Austrianism is mutually contradictory, axiomatically false, materially/formally inconsistent and ALL approaches got profit theory, employment theory, and the theory of money wrong.
Asad Zaman argues: “It should be immediately obvious that active government involvement in creating full employment helps the bottom 90%. It is slightly less obvious that monetary expansion, which may create inflation, is also helpful to the poorer segment of society. This is because the poor are generally borrowers of money, so the value of their debt in real terms becomes reduced. Similarly, easy money makes it easier for them to borrow. At the same time, Keynesian policies hurt the top 1%.”
The claim that Keynes fought for the cause of ninety-nine-percenters and against the one-percenters is false. In effect, the opposite is true.#2
Heterodoxy’s repetitive critique of Orthodoxy has run into the dead end.#3 Heterodoxy, too, is scientifically worthless political economics. It is time to forget the whole proto-scientific blather and to move on: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug)
Time to bury failed/fake scientists for good and to leave the creepy intellectual graveyard of orthodox and heterodox economics behind.
Egmont Kakarot-Handtke
#1 For details see
Keynes’ intellectual nonexistence
http://axecorg.blogspot.de/2017/12/keynes-intellectual-non-event.html
How Keynes got macro wrong and Allais got it right
http://axecorg.blogspot.de/2016/09/how-keynes-got-macro-wrong-and-allais.html
Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421
#2 For details see
Who or what exactly did Keynes save?
http://axecorg.blogspot.de/2016/11/who-or-what-exactly-did-keynes-save.html
Keynes, Lerner, MMT, Trump and exploding profit
https://axecorg.blogspot.de/2017/12/keynes-lerner-mmt-trump-and-exploding.html
Fiscal policy and the Humpty Dumpty Fallacy
https://axecorg.blogspot.de/2018/02/fiscal-policy-and-humpty-dumpty-fallacy.html
#3 Economics: communication without content
https://axecorg.blogspot.de/2018/02/economics-communication-without-content.html
Paul Krugman and economic poultry entrails reading
Comment on Brad DeLong on ‘Paul Krugman Looks Back at The Last Twenty Years of the Macroeconomic Policy Debate’
A theory must satisfy TWO criteria ― material AND formal consistency. Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing. This is known since 2000+ years: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle, Wikipedia)
Paul Krugman, for one, is quite explicit about how he has solved the Starting Problem: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”
Paul Krugman has not realized since his student days that neoclassical economics has already been dead in the cradle 140+ years ago. In other words, the neoclassical premises are NOT certain, true, and primary. In still other words, neoclassical economics is axiomatically false. And when the axiomatic foundations are false the whole analytical superstructure is false.#1 As a result, the microfoundations approach from Jevons/Walras/Menger onward to DSGE is scientifically worthless.
But Paul Krugman is also a Keynesian, sorta-kinda. Keynes built macro on these premises: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)
Unfortunately, Keynes got macroeconomic profit wrong: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)
Because profit is ill-defined the whole theoretical superstructure of Keynesianism is false, in particular all I=S/IS-LM models.#2
Paul Krugman, of course, realized nothing and used and praised IS-LM as superior tool for macroeconomic analysis.#3
Needless to emphasize that Walrasian microfoundations and Keynesian macrofoundations do not fit together. Therefore, a synthesis of the two is methodological madness since Samuelson’s 1947 textbook.
Until this day, Paul Krugman’s economic policy guidance has NO sound scientific foundations but is plucked out of the thin air of political populism. Because both Walrasianism and Keynesianism is axiomatically false, economic policy advice is until this day no different from the poultry entrails reading of the old Roman haruspex.
Egmont Kakarot-Handtke
#1 For details of the big picture see cross-references Axiomatization
http://axecorg.blogspot.de/2014/12/axiomatization-cross-references.html
#2 For details of the big picture see cross-references Keynesianism https://axecorg.blogspot.de/2016/09/keynesianism-cross-references.html
#3 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2392856
Why, Egmont, why, do you persist!?
Snapshot from the current New Keynesianism vs MMT debate*
As everybody knows, there are inadmissible operations in mathematics, e.g. division by zero. Likewise, there are inadmissible operations in the process of the definition of a subject matter, e.g. giving two names to the same thing. Trivially, if you are a witness and tell the police that Maria crashed the car against the wall and one minute later that Josef crashed the car and when the police officer remarks there is a contradiction and you answer no, not at all, its the same guy I only call him sometimes Maria and sometimes Joseph you are not regarded as a reliable witness but as a moron or worse, as an economist.
So, one more time in slow motion.
The elementary production-consumption economy is for a start given by two sectors, i.e. household- and business sector, and defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (Q≡C−Yw, S≡Yw−C).
Wage income Yw is a flow from the business to the household sector. Consumption expenditures C is a flow from the household to the business sector. Profit/loss is the DIFFERENCE of these two flows Q≡C−Yw and saving/dissaving is the exact mirror image S≡Yw−C.
Because we have TWO sectors we have TWO balances and if we “consolidate” the two sectors we get Q+S=0, that is, trivially, for the economy as a whole there is NO balance. “Consolidation” destroys the information about profit/loss and saving/dissaving that we have gained by splitting up the economy into two sectors.
So, we have the flow wage income Yw and the difference of flows (= balance) profit/loss Q and saving/dissaving S. Note that a flow is always positive, while a balance can be either positive or negative. A smart macro accountant knows that to lump a flow and a balance together is a category mistake.#1 Economists commit this methodological blunder since Adam Smith. They still do not realize that by saying total macroeconomic income is the sum of wages and profits they are exposing themselves as incurable incompetent scientists.
From the definition Q≡C−Yw follows by mindless symbol manipulation Q+Yw≡C, hence the sum of Q and Yw is already implicitly defined by the initial definition of profit/loss.
To introduce an ADDITIONAL definition of the sum of wages and profits is forbidden by the methodological rule called Occam’s Razor. So, Ψ≡Q+Yw is INADMISSIBLE and leads to Ψ≡C which says that two symbols are used for the same thing. The formula states that the word total income (symbol Ψ) and the word consumption expenditures (symbol C) can be used interchangeably.
Obviously, this is semantic madness. However, in the formulation total income is equal to the value of output is sounds like a deep economic insight. And so this Humpty Dumpty stuff became the foundation of Keynesianism: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)
Post Keynesians, Anti-Keynesians, and MMTers have not realized until this day that they are caught in a methodological delirium. Because the foundational balances equation of MMT is proto-scientific junk the whole of MMT is proto-scientific junk, that is, brain-dead political agenda pushing for the one-percenters.
Egmont Kakarot-Handtke
* For full-view links see
Political economics: Who hijacks British Labour?
https://axecorg.blogspot.de/2018/03/political-economics-who-hijacks-british.html
#1 A tale of three accountants
https://axecorg.blogspot.de/2017/07/a-tale-of-three-accountants.html
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