National Review Strikes Again!

Mark Thoma http://economistsview.typepad.com/ tells us that the know-nothings at National Review are launching hit pieces on Ben Bernanke. Mark attempts the tas of cleaning out the entire stable. I'm just going to deal with the first piece of horsesh-t I come across:

John Tamny on Ben Bernanke and the Federal Reserve on NRO Financial: Bernanke asked how much demand in the latest quarter “appears to have been satisfied out of inventories rather than from new production.” But supply-siders don’t even consider this — they don’t because they know that products are ultimately bought with other products. “Demand” will always exist, as human wants are unlimited. But what Bernanke deems “demand” is in fact producers offering up their surpluses for those of others. In the supply-side model, what Bernanke sees as a fall in aggregate demand is in fact a fall in production — something supply-siders agree results from governmental meddling along the lines of excessive taxation, regulation, and unstable money...

Bernanke's point is that in the second quarter households, the government, and investing businesses bought one-half percent more goods and services than U.S. producers made and U.S. businesses (net) imported. Thus inventories are now below levels that businesses think they need to run their operations efficiently. In the next several quarters, therefore, businesses are going to ramp up production in order to build their inventories back to a comfortable level. This is an important thing to notice. It is not a contentious or a disputed point--except to the likes of John Tamny.

Tamny is enraged that Bernanke is thinking about fluctuations in employment and capacity utilization at all. We, Tamny says, "don't even consider this" because "'[d]emand' will always exist, as human wants are unlimited.... [W]hat Bernanke sees as a fall in aggregate demand is in fact a fall in production..." Let us not comment on the fact that Tamny is too stupid to notice that what Bernanke is talking about is not a fall but a rise in aggregate demand: that's just too embarrassing for words. Let us, instead, comment that Bernanke is talking about a fact about the world--that spending was larger than production in the second quarter. And Tamny's response is that that fact doesn't exist: because "products are ultimately bought with other products," spending cannot be anything other than equal to production. In Tamny's world, theory proves that fluctuations in unemployment and capacity utilization are logically impossible.

Now there was an economic theory that held that fluctuations in unemployment and capacity utilization were logically impossible: that supply was automatically equal to demand. That theory is called "Say's Law," after nineteenth-century French economist Jean-Baptiste Say. That theory wrong: there are fluctuations in unemployment and capacity utilization. And because that theory is wrong, we have the Federal Reserve. One way to think about the Federal Reserve's mission is that it's job is to try to make sure that spending is matched to production--to make Say's Law true in practice, even though it is not true in theory.

Bernanke's attention to the details of aggregate demand is, of course, on of the reasons that he is exceptionally highly qualified to chair the Federal Reserve.

Comments

[howard]

i thought i understood what supply-siders believed: that the government's role in the economy should shrink (as determined by percentage of gdp), and that taxes should be lowered commensurate with the cuts in spending and biased towards marginal cuts at the high end of the income distribution ladder to provide incentives for earning and investing in this newly freed from government overweight economy.

after reading john tanny, i can't begin to understand what he is talking about, and how it relates to what i thought that supply side thinking (as, say, bruce bartlett would define it) is. in fact, i can't make heads or tails out of the words that tanny has strung together.

doesn't he belong in the luskin sweepstakes?

[just pete]

Its a sermon, not a discussion. Think about it. When was the last time you heard an honest discussion of the issues from the Bush administration or the cheerleaders at what I prefer to refer to as Nationalist Review.

Just like sermons said the Earth was flat - then round, dinosaurs never existed - then existed along side ol' Adam and Eve (anyone seen Lilith?), its just cheerleading of the flock - vote republican and remember to give...

[pgl]

Mark Thoma's attack on Tamny's incredibly stupid NRO rant focused on Tamny's denial of a full employment constraint (Kudlow does not understand the law of scarcity). Kudos to you for picking up on Bernanke's correct notion that the fall in inventories means expenditures exceeded production last quarter - an important point indeed. There is a 3rd thing that Tamny blew, which relates to his outsourcing discussion. I guess we'll have to cover this third incredibly dumb argument over at Angrybear given you and Mark has KOd him on the othe two.

Tamny serves one function in life - he makes Kudlow look smart by comparison. But then he's no Luskin!

[P O'Neill]

Astounding. It seems like there's a new front in the NRO Global Struggle Against Neoclassical Economics (GSANE) every week -- the War on Sampling has been superceded by War on National Income Accounting, or equivalently, a War on Aggregate Demand. Have these guys taken a college macroeconomics course at any level?

[N.V. Bukharin, esq.]

Heighten the contradictions! Luskin for fed chairman!

[weco]

P O'Niell: It seems like there's a new front in the NRO Global Struggle Against Neoclassical Economics (GSANE) every week.

I think the movement is called the INternational Struggle Against Neoclassical Economics (INSANE). They have now stopped to peddle psuedo-economic theories in favour of psuedo-accounting ala Enron.

But it still doesn't beat Luskin's War on Real Exchange Rate.

[Mark Sullivan]

This is kind of an aside from the point of the post, but I had to look up Say's Law on wikipedia. The description of Say's Law there claims that "nineteenth century economists" used Say's Law to explain unemployment:

"Keynes (see more below) claimed that according to Say's law involuntary unemployment cannot exist due to inadequate aggregate demand. However, involuntary unemployment could be explained in a different way by the 19th century economists, and the classical economists actually used Say's law to understand and explain even long-term unemployment and recession.

Recession was explained as arising from production not meeting demand in quality. While in general, more isn't produced than there could be demand for, some particular products are produced too much and consequently other products too little. This "disproportionality" would lead to a producer not being able to sell the products in cost-covering prices. Hence he will be lacking in the capability to buy and this will cause contraction in other parts of industry, too.

Such economic losses and unemployment were seen as an intrisic property of the capitalistic system. Division of labour leads to a situation where one always has to anticipate what others will be willing to buy, and this will lead to miscalculations."

[bakho]

Isn't the NRO complaint that Bernanke is not a supply-sider?

What would be Fed policy run by supply-siders?

All I can imagine is they would let the economy expand as rapily as possible and inflate away the debt. Then their prediction that tax cuts pay for themselves with increased revenue (however inflated) might possibly come true.

[oskar]

"""But supply-siders don’t even consider this — they don’t because they know that products are ultimately bought with other products. “Demand” will always exist, as human wants are unlimited. """

It looks like Tamny has never heard of Keynes. Or is it that supply-siders hate him so much that they removed phrases like "agregated demand" and "low equilibrium" from their supply-speak?

p.s. at least there is Bernanke to keep up the quality at NRO: "Keynes Was No Crypto-Fascist"
http://www.nationalreview.com/nrof_bartlett/bartlett200401190849.asp

[kharris]

It makes my head hurt, after all this time, to hear this stuff called "supply side". There can be no such thing as "supply side economics". Is there any economist who doesn't think that the supply function matters? I'd guess "no".
Is there anybody with the slightest shred of understanding who thinks the demand function doesn't matter, and that somehow, between them, these two functions determine the level of production, prices, employment, and such?

There is no such thing as a "supply-side economist". There are economists - people who employ concepts of supply and demand and the like to analyze events - and there non-economists. If one thinks dwelling on the supply function to the exclusion of all else is a good idea, then one is not an economist. Hack, liar, religionist, moron - these are all possibilities - but not an economist.

[Jussi]

Whatever the pros and cons, Griffiths is right, and economists DO kill more people than soldiers. "Especially when one considers, that most wars are based on economics".

The 'supply-siders', who only wish to supply themselves.

[Jussi]

Sorry for mentioning it, but the black science does know this, doesn't it?

[John Tamny]

"One way to think about the Federal Reserve's mission is that it's job is to try to make sure that spending is matched to production--to make Say's Law true in practice, even though it is not true in theory."

And you guys actually take yourselves seriously? Statist nonsense like DeLong's point goes far in explaining why there are employment fluctuations. That DeLong thinks anyone (including Bernanke) could manipulate the dollar in such a way that spending will be properly matched to production is surely delusional...

[Alan Greenspan has done a damned good job. If you want to call Greenspan "delusional" and the extraordinarily low level of the average unemployment rate during his tenure "imaginary," be my guest.]

[RJ Cornell]

Hold up a minute, who says Say's Law is wrong. If you think about it Say's Law is extremely logical, and indeed represents well the neoclassical long run that most credible mainstream economists believe in today. In the long run Agreggate Demand is inconsequential. It is amazing how economists being normally rational people can believe that simply wanting or demanding something at the macro level can somehow lead to that something actually existing. Only at the micro level does demand lead to allocation of resources along the lines that society values them. In the neoclassical long run changes in aggregate demand simply move us to a different price level, with our actual production fixed by real things like technology and labor supply. Any argument against Say's Law must be made in the short run when people don't adjust to rising prices and expectations are not rational. Many new studies including one by Cato say that the short run condition may last only a year or less. On the macro level then, supply does matter more than demand.