Brad DeLong

Monday: Inequality in the Americas

UPDATE: Video

Monday: Inequality in the Americas: Center for Latin American Studies University of California, Berkeley:

Economic and social inequality is critical throughout the Americas. CLAS has organized a path-breaking real-time dialogue across the hemisphere. Using the web, we are connecting Berkeley professors and audiences to colleagues and audiences throughout Latin America.

MONDAY

Oscar Landerretche and Brad DeLong: The Politics of Inequality

Oscar Landerretche is the director of the School of Economics and Business at Universidad de Chile. Previously, he worked as the Chilean consultant for Global Source Partners’ Consulting Network in New York (2006-2011) and was the Executive Secretary of the first phase of Michelle Bachelet’s presidential campaign. He is an editorial columnist for La Tercera.

Brad DeLong is a professor of economics at UC Berkeley, chair of the Political Economy of Industrial Societies major, and a research associate at the National Bureau of Economic Research. He served as the Deputy Assistant Secretary of the Treasury for Economic Policy from 1993 to 1995.  

Monday, October 15, 12:00 PM Room 370, Dwinelle Hall

So Noah Smith Misleads Me by Telling Me That Stephen Williamson Is Finally Talking Sense...

Noah Smith is wrong:

New Monetarist Economics: How Central Bankers Think: The economically efficient real interest rate r* is what Woodford would call the "Wicksellian natural rate"… the equilibrium real interest rate if all wages and prices were flexible…. [H]ow do we know what r* is? From Charles Evans's point of view, that's easy. If Fed policy stayed unchanged (so that r is unchanged), and the unemployment rate went up, r* must have gone down…. These ideas may be easy for Fed officials to explain to the Rotary club, but if you recite the ideas enough you start to believe them. How can anyone think that our current problem is that efficient real interest rates fall far below actual real interest rates? A short rate of -2% is too high? Why? TIPS yields of -1.65% (5 year) or 0.37% (30 year) are too high? Again, why? No one thinks that monetary policy has any long run consequences…. We know there are problems with the targeting of monetary aggregates, but surely most of us think that exchange in some class of assets is what drives long-run inflation. Where's the money?

Back in 1937 John Hicks pointed out a symmetry between Fisherian monetary approaches and Wicksellian financial approaches to macroeconomics. Fisherian monetary approaches looked at how people divided their income between accumulating or decumulating liquidity and spending on other commodities in the context of an interest rate r that is determined someplace else. It was thus an incomplete theory. Wicksellian financial approaches looked at how people divided their income between accumulating or decumulating savings vehicles (including outside money) and spending on currently-produced goods and services in the context of an interest rate r that is determined someplace else.

First, it's a mistake, Hicks said, to complain that finance is absent from a Fisherian monetary approach--for finance is what determines the real interest rate r needed to make sense of MV(r+π) = PY.

And, second, Hicks said, it is a mistake to complain that money is absent from a Wicksellian financial framework--for money is what determines the nominal interest rate i needed to make sense of S(Y) = I(i-π, r*) + (G-T).

There has been no excuse since 1937 for anybody to cry "where's the money?" No excuse at all

Paul Krugman: Fact-Checking Financial Recessions

Paul Krugman: Fact-Checking Financial Recessions:

[Alan] Taylor… and [Morris] Schularick… confirm Ken Rogoff’s dictum that we’re suffering from a “garden-variety severe financial crisis”…. This should not be taken as a reason to believe that we couldn’t and shouldn’t be doing better; experience in this crisis has been overwhelmingly supportive of a Keynesian view in which the problem is inadequate demand, and in which fiscal policy (with an assist from unconventional monetary policy) could have greatly ameliorated the pain. But there’s nothing to suggest that the policies of the Obama administration have made it worse; on the contrary, they’ve almost surely made it less bad than it might have been. And of course I had all this information in hand when Mary Matalin tried to tell me, out of her deep knowledge of economic history, that this is the worst ever.

Moritz Schularick and Alan Taylor: Fact-checking financial recessions

http://www.voxeu.org/article/fact-checking-financial-recessions

Read Like a Pirate!

So with the death of Eric Hobsbawm I decide that I should load up his Age of Revolution and Age of Capital on my Kindle for my Magellen-like trip next week...

Can there really be no purchasable ebooks of either!?

So now I am on the lookout for some WareZ...

Information wants to be free!

Eric Hobsbawm, RIP

Let me correct the late Tony Judt, who said:

If he had not been a lifelong Communist, [Eric Hobsbawm] would be remembered simply as one of the great historians of the 20th century.

It should read:

Even though he was a lifetime Communist, Eric Hobsbawm was one of the greatest historians of the 20th century.

A thousand years from now people are likely to still read The Age of Revolution and The Age of Capital. I have tried to write reviews of those two books, and so far I have failed--I have been unable to write anything that conveys just how good they are.

Brad DeLong: Eric Hobsbawm's "Age of Extremes": Hoisted from the Archives

Hobsbawm's 19th century "Age" trilogy is great. His 20th century Age of Extremes is less good--profitable as a work of history, but also, alas, profitable as an index of the impact decades of doublethink can leave on a good mind…

Hoisted from the Archives from back in 1995, in that decade between the Fall of the Berlin Wall and the Fall of the Towers:

Brad DeLong: Hobsbawm's Age of Extremes:

Planet Hobsbawm

In the beginning was Karl Marx, with his vision of how the Industrial Revolution would transform everything and wash us up on the shores of Utopia. Marx saw the economy as the key to history: every forecast and historical interpretation must be based on the economy's logic of development. Sometimes--as in much of Eric Hobsbawm's previous work on the history of the nineteenth century--this functioned relatively well.

But sometimes it led to very bad results indeed. And when Marx and Engels's writings became sacred texts for a world religion called Communism, things passed beyond the absurd: the belief that the logic of development of the economy was the most important thing about society became entangled in the belief that Joe Stalin was our benevolent master and ever-wise guide.

Now it is over. The red stars of the Soviet Union no longer shine from the tops of the Kremlin towers at night. Radicals still seek Utopia, but they no longer think the road leads through the economy. Instead, they study culture--as if to change the world just by understanding it. It is difficult to see a future in which authors with the intelligence, industriousness, and audience of Eric Hobsbawm are disciples of Karl Marx in anything like the sense that Eric Hobsbawm is a disciple of Marx.

Now Eric Hobsbawm has written a history of the twentieth century, The Age of Extremes. It has by and large received good reviews: Stanley Hoffman in the New York Times Book Review; Eugene Genovese in the New Republic; Edward Said in the London Review of Books.

But my reaction to The Age of Extremes was different. It struck me as history gone awry: a sketch of the twentieth century not as it has been lived here on earth but as it might have been lived somewhere else, on some "planet Hobsbawm" that might be found in one of those parallel universes often visited in Star Trek episodes, where what looks familiar at first glance turns out on close examination to be alien indeed.

Charles Plosser Says Our Big Problem Today Is That Our Lesser Depression Is Not Great Enough

Tim Duy:

Plosser Opposes the 1933-37 Expansion: Philadelphia Federal Reserve President Charles Plosser spoke yesterday, reiterating his opposition to QE and his expectation that it will have no impact on growth.... What caught my attention was this:

Once the recovery takes off, long rates will begin to rise and banks will begin lending the large volume of excess reserves sitting in their accounts at the Fed. This loan growth can be quite rapid, as was true after the banking crisis in the 1930s, and there is some risk that the Fed will need to withdraw accommodation very aggressively in order to contain inflation.

I am somewhat concerned that a Federal Reserve official would use loan growth in the 1930s as an example of what could go wrong with quantitative easing.  It should be seen as an example of what could go right.

Presumably... [t]his is a problem because...why?  The inflation.... Yes, there was inflation after 1933.  And no, this wasn't a bad thing.  The inflation, as well as the loan growth were part of the recovery.  They were features, not bugs, of easier policy. And even by 1937, both the price level and loans were below pre-recession peaks. Yet policy turned prematurely tighter, tipping the US economy back into recession and deflation.  

Bottom Line:  Fed hawks obsess with the issue of having to unwind quantitative easing when the economy improves.  We should be so lucky.  Shouldn't we wait until we see some hope that rates can sustain themselves above at least 3% before we worry about this?  Somehow the hawks fail to understand that policy is always reversed in the next pahse of the business cycle.   Simply put,  if we need to unwind quantitative easing, the policy was indeed effective.  Plosser takes the wrong lesson away from rapid loan growth in the 1930s.  The lesson is not that we should fear recovery.  The real lesson was to avoid premature tightening of policy.

Tim Duy's Fed Watch: Reinhart-Rogoff Are Not Excuses Not To Do More

Excuses Not To Do More:

Josh Lehner… concludes:

when the Great Recession is compared… to the Big 5 financial crises and the U.S. Great Depression (thanks to U.S. Treasury for adding that to the graph), the current cycle actually compares pretty favorably. This is likely due to the coordinated global response to the immediate crises in late 2008 and early 2009….

This is worth highlighting because of the eagerness of policymakers to embrace Reinhart and Rogoff as an excuse to avoid fiscal and monetary policy…. Bullard sees Reinhart and Rogoff as an excuse to do nothing…. Bullard completely misses the… argument that if financial crises are long-lasting, then the policy response needs to be more aggressive. As Lehner points out, aggressive policy response can mitigate the impact of the crisis.  Bullard should read Reinhart and Rogoff as a demand to do more, not an excuse to do less.

Indeed, Reinhart and Rogoff have said as much.  Via Ezra Klein:

if you look at the leaked memo that the Obama administration was using when they constructed their stimulus, you’ll find, on page 10 and 11, a list of prominent economists the administration consulted as to the proper size for the stimulus package. And there, on page 11, is Rogoff, with a recommendation of “$1 trillion over two years” — which is actually larger than the American Recovery and Reinvestment Act. So if they’d been following Rogoff’s advice, the initial stimulus would have been even bigger — not nonexistent.

As for Reinhart, I asked her about this for a retrospective I did on the Obama administration’s economic policy:

The initial policy of monetary and fiscal stimulus really made a huge difference…. I would tattoo that on my forehead. The output decline we had was peanuts compared to the output decline we would otherwise have had in a crisis like this. That isn’t fully appreciated.

Yes, Jim Medoff Moved the Needle

Andy Harless writes:

Employment, Interest, and Money: James Medoff, Stagflation, the Phillips Curve, and the Greenspan Boom: James Medoff, my thesis advisor in graduate school and later my collaborator and business associate, died on Saturday, September 15 after a long struggle with multiple sclerosis.  In the field, he was probably best known for his work on labor market institutions, and particularly for his work with Richard Freeman on the impact of unionization. But… I was a student of macroeconomics… I was intrigued by a paper he had written with Katharine Abraham entitled “Unemployment, Unsatisfied Demand for Labor, and Compensation Growth, 1956-1980.”… [T]he Medoff-Abraham paper… said was that there was not nearly as much “stag” in the stagflation as we thought.  The labor market, it suggested, had been booming during much of the 1970’s despite the appearance of high unemployment.  The implication was that the unemployment of the 1970’s was largely “structural”… once you realized that, the accompanying inflation shouldn’t surprise you.

Paul Krugman Asks a Question: On the "Austrian" Hatred of Fractional Reserve Banking, Paper Money, etc. Weblogging

Paul Krugman asks a question:

Ron Paul on Money Market Funds: [T]he Ron Paul link, in which [Ron Paul] condemned fractional reserve banking, prodded me to ask a question I’ve been meaning to ask: How do the Austrians propose dealing with money market funds?

I mean, it has always been a peculiarity of that school of thought that it praises markets and opposes government intervention — but that at the same time it demands that the government step in to prevent the free market from providing a certain kind of financial service. As I understand it, the intellectual trick here is to convince oneself that fractional reserve banking, in which banks don’t keep 100 percent of deposits in a vault, is somehow an artificial creation of the government. This is historically wrong…. But consider a more recent innovation: money market funds. Such funds are just a particular type of mutual fund — and surely the Austrians don’t want to ban financial intermediation (or do they?). Yet shares in a MMF are very clearly a form of money — you can even write checks on them — created out of thin air by financial institutions, with very few pieces of green paper behind them.

So are such funds illegitimate? What about repo, which has many of the same features?

One of the key lessons of the 2008 crisis was precisely that banks are defined by what they do, not by what they look like, and there are a whole range of financial arrangements that in economic terms act a lot like fractional reserve banking. So would a Ron Paul regulatory regime have teams of “honest money” inquisitors fanning across the landscape, chasing and closing down anyone illegitimately creating claims that might compete with gold and silver? How is this supposed to work?

OK, I don’t expect a serious answer. But it’s scary that this has become the more or less official doctrine of the GOP.

Well, in its origins it springs out of Medieval Christian (and earlier) condemnations of usury as unjust enrichment:

And by the 1920s it's part of a general fear of Jews, intellectuals, homosexuals, financiers, and people who weren't born rich but might be smarter and become richer than you. For example, Churchill's Secretary P.J. Grigg on Keynes:

I distrust utterly those economists who have with great but deplorable ingenuity taught that it is not only possible but praiseworthy for a whole country to live beyond its mens on its wits and who in Mr. Shaw's description tech that it is possible to make a community rich by calling a penny two pence, in short who have sought to make economics a vade mecum for political spivs...

But on the doctrinal level? I tried to untangle it. I am not sure whether I was successful. In any event, here it is all in one place:

The Objectives of the Federal Reserve: Memorandum from Governor Marriner Eccles to Senators Glass, Fletcher, and Bulkley on June 6, 1935

Marriner Eccles:

The proposed Banking Act of 1935, as originally introduced, contained no statement of objectives to be sought by the Federal Reserve Board in exercising the powers of credit control granted to it.

It was argued, however, that Congress was delegating to the Board some of its legislative power to coin money and regulate the value thereof, and, accordingly, that a guiding principle or statement of objectives should be included in the bill in order to eliminate any question as to the constitutionality of the delegation of power.

As a result, H.R. 7617, when it passed the House on May 9, 1935, contained the following statement of objectives in section 204(b) of the bill:

It shall be the duty of the Federal Reserve Board to exercise such powers as it possesses in such manner as to promote conditions conducive to business stability and to mitigate by its influence unstabilizing fluctuations in the general level of production, trade, prices, and employment, so far as may be possible within the scope of monetary action and credit administration.

Thus there was as of 1935 a quadruple mandate: production, trade, prices, and employment--all subsumed under the heading of "promot[ing] conditions conducive to business stability".

The 1946 Employment Act--which applies to the Federal Reserve as much as to other arms of the federal government--took a different tack:

The Congress hereby declares that it is the continuing policy and responsibility of the federal government to use all practicable means… for the purpose of creating and maintaining, in a manner calculated to foster and promote free competitive enterprise and the general welfare… useful employment for those able, willing, and seeking work, and to promote maximum employment, production, and purchasing power…[1]

The 1978 Humphrey-Hawkins bill shifted the Federal Reserve to its current position, requiring that the Federal Reserve implement monetarism:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential…

and imposes either a triple or a quadruple mandate, depending on whether one understands "production" as a separate goal:

…to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

---

[1] Full text:

The Congress hereby declares that it is the continuing policy and responsibility of the federal government to use all practicable means consistent with its needs and obligations and other essential considerations of national policy with the assistance and cooperation of industry, agriculture, labor, and State and local governments, to coordinate and utilize all its plans, functions, and resources for the purpose of creating and maintaining, in a manner calculated to foster and promote free competitive enterprise and the general welfare, conditions under which there will be afforded useful employment, for those able, willing, and seeking work, and to promote maximum employment, production, and purchasing power.

Brad DeLong: Berkeley Friday Afternoon Political Economy Colloquium: Friday February 18, 2011: "Austerity" in the Context of the Global Economic Downturn

Brad DeLong: Friday February 18, 2011: "Austerity" in the Context of the Global Economic Downturn: Let me speak as a card-carrying neoliberal, as a bipartisan technocrat, as a mainstream neoclassical macroeconomist--a student of Larry Summers and Peter Temin and Charlie Kindleberger and Barry Eichengreen and Olivier Blanchard and many others.

We put to one side issues of long-run economic growth and of income and wealth distribution, and narrow our focus to the business cycle--to these grand mal seizures of high unemployment that industrial market economies have been suffering from since at least 1825. Such episodes are bad for everybody--bad for workers who lose their jobs, bad for entrepreneurs and equity holders who lose their profits, bad for governments that lose their tax revenue, and bad for bondholders who see debts owed them go unpaid as a result of bankruptcy. Such episodes are best avoided.

From my perspective, the technocratic economists by 1829 had figured out why these semi-periodic grand mal seizures happened. In 1829 Jean-Baptiste Say published his Cours Complet d'Economie Politique… in which he implicitly admitted that Thomas Robert Malthus had been at least partly right in his assertions that an economy could suffer from at least a temporary and disequliibrium "general glut" of commodities. In 1829 John Stuart Mill wrote that one of what was to appear as his Essays on Unsettled Questions in Political Economy in which he put his finger on the mechanism of depression.

Semi-periodically in market economies, wealth holders collectively come to the conclusion that their holdings of some kind or kinds of financial assets are too low. These financial assets can be cash money as a means of liquidity, or savings vehicles to carry purchasing power into the future (of which bonds and cash money are important components), or safe assets (of which, again, cash money and bonds of credit-worthy governments are key components)--whatever. Wealth holders collectively come to the conclusion that their holdings of some category of financial assets are too small. They thus cut back on their spending on currently-produced goods and services in an attempt to build up their asset holdings. This cutback creates deficient demand not just for one or a few categories of currently-produced goods and services but for pretty much all of them. Businesses seeing slack demand fire workers. And depression results.

What was not settled back in 1829 was what to do about this. Over the years since, mainstream technocratic economists have arrived at three sets of solutions:

1. Don't go there in the first place. Avoid whatever it is--whether an external drain under the gold standard or a collapse of long-term wealth as in the end of the dot-com bubble or a panicked flight to safety as in 2007-2008--that creates the shortage of and excess demand for financial assets.

2. If you fail to avoid the problem, then have the government step in and spend on currently-produced goods and services in order to keep employment at its normal levels whenever the private sector cuts back on its spending.

3. If you fail to avoid the problem, then have the government create and provide the financial assets that the private sector wants to hold in order to get the private sector to resume its spending on currently-produced goods and services.

There are a great many subtleties in how a government should attempt to do (1), (2), and (3). There is much to be said about when each is appropriate. There is a lot we need to learn about how attempts to carry out one of the three may interfere with or make impossible attempts to carry out the other branches of policy. But those are not our topics today.

Our topic today is that, somehow, all three are now off the table. There is right now in the North Atlantic no likelihood of reforms of Wall Street and Canary Wharf to accomplish (1) and diminish the likelihood and severity of a financial panic. There is right now in the North Atlantic no likelihood at all of (2): no political pressure to expand or even extend the anemic government-spending stimulus measures that have ben undertaken. And there is right now in the North Atlantic little likelihood of (3): the European Central Bank is actively looking for ways to shrink the supply of the financial assets it provides to the private sector, and the Federal Reserve is under pressure to do the same--both because of a claimed fear that further expansionary asset provision policies run the risk of igniting unwarranted inflation.

But there is no likelihood of unwarranted inflation that can be seen either in the tracks of price indexes or in the tracks of financial market readings of forecast expectations.

Nevertheless, you listen to the speeches of North Atlantic policymakers and you read the reports, and you hear things like:

Obama said that just as people and companies have had to be cautious about spending, ‘government should have to tighten its belt as well...’

Now there were—and perhaps there still are—people in the White House who took these lines out of speeches as fast as they could But the speechwriters keep putting them in, and President Obama keeps saying them, in all likelihood because he believes them.

And here we reach the limits of my mental horizons as a neoliberal, as a technocrat, as a mainstream neoclassical economist. Right now the global market economy is suffering a grand mal seizure of high unemployment and slack demand. We know the cures--fiscal stimulus via more government spending, monetary stimulus via provision by central banks of the financial assets the private sector wants to hold, institutional reform to try once gain to curb the bankers' tendency to indulge in speculative excess under control. Yet we are not doing any of them. Instead, we are calling for "austerity."

John Maynard Keynes put it better than I can in talking about a similar current of thought back in the 1930s:

It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man's speculative spirit. It would, they feel, be a victory for the Mammon of Unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy.

We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.

I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity...

I do not understand it either. But many people do. And I do not understand why such people think as they do.

Every Time I Read David Glasner, I Think That the Academic Prestige Hierarchy of Economists Writing About Monetary Policy Is Badly Inverted: Think of the Alternative Monetary Policy Strategy Spaces Department

Not, mind you, that I think David is a better monetary economist than Mike Woodford--I do find I learn more from paying careful attention to Mike than to David. But I can't think of anybody else I reliably learn more from paying careful attention to…

David Glasner:

Uneasy Money: In my previous post, I criticized Ben Bernanke’s speech last week at the annual symposium on monetary policy at Jackson Hole, Wyoming. It turns out that the big event at the symposium was not Bernanke’s speech but a 98-page paper by Michael Woodford, of Columbia University. Woodford’s paper was important, because he is widely considered the world’s top monetary theorist, and he endorsed the idea proposed by the intrepid, indefatigable and indispensable Scott Sumner that the Fed stop targeting inflation and instead target a steady growth path of nominal GDP. That endorsement constitutes a rather stunning turn of events in which Sumner’s idea (OK, Scott didn’t invent the idea, but he made a big deal out of it when nobody else was paying any attention) has gone from being a fringe idea to the newly emerging orthodoxy in monetary economics.

John Cochrane, however, is definitely not with the program…. I am going to challenge two assertions that Cochrane makes. These aren’t the only ones that could be challenged, but it’s getting late.

Possible Purple Rhetorical Passages for the Summary Chapters of "Slouching Towards Utopia?: The Economic History of the Extended Twentieth Century": Part XXII

The Neoliberal Bet

All in all, the history of economic policymaking during the 20th century was profoundly depressing. Inflation. Deflation. Trade protection. Insufficient investment in infrastructure. Corruption. Recession. Negative-sum redistribution. And the two biggies: the Great Depression, and that hideous destructive catastrophic mistake was world communism--the second greatest catastrophe the world of the 20th century saw.

None of these were in any sense imposed on us by nature or fate. We did them all to ourselves.

Ten years ago, however, it was possible to coherently and cogently argue that economic policymakers had learned their lesson. This was the neoliberal social democratic bet: placing your money on the idea that economic policymakers had finally learnt what institutions and practices worked best. Market economies. Government provision of public goods and correction of the most gross externalities. Free-trade and export oriented industrialization. Progressive taxes on consumption and free universal public education to create a relatively equal middle-class society. A safety net in the form of large-scale social insurance--pensions, health, unemployment,disability. And the most important part of the safety net of all: macroeconomic stabilization via monetary policy, lenders of last resort, and appropriate financial regulation. 

In the 1984-2007 years of the Great Moderation it was possible to argue that policymakers had adopted or at least could see their way to adopting institutions and practices that made the social democratic or if you prefer neoliberal mixed economy work well.

Today, of course, in the wake of the financial crisis of 2007-08, the downturn of 2008-09, the subsequent flatlining of the employment-population ratio at a depressed level in United States and the second wave of recession in Europe, such economic policy triumphalism looks like one of those fits of irrational exuberance that economists and their acolytes undergo every generation or so.

The End of Middle-Class America

Hoisted from the Archives: DeLong Smackdown Watch: Cosma Shalizi Argues That Adam Smith Is Not a Real Economist Edition

Cosma Shalizi:

Brad DeLong Makes a Wishful Mistake: Brad DeLong asserts that the microfoundations of economics point not to a Hobbesian vision of the war of all against all, but rather to Adam Smith's propensities for peaceful cooperation, especially through exchange.

The foundation of microeconomics is not the Hobbesian 'this is good for me' but rather the Smithian 'this trade is good for us,' and on the uses and abuses of markets built on top of the 'this trade is good for us' principle.

Bertram objects that this isn't true, and others in DeLong's comments section further object that modern economics simply does not rest on this Smithian vision. DeLong replies: "Seems to me the normal education of an economist includes an awful lot about ultimatum games and rule of law these days..."

I have to call this one against DeLong….

Why History of Economic Thought Is Important: Whack-a-Mole Wall Street Journal/Arthur Laffer Edition

Why oh why can't we have a better press corps? Why oh why can't we have better right-wing economists?

As every even casual student of the history of economic thought knows, back before 1829 whether it was sensible to talk about increases in economic agents' planned spending raising and decreases lowering economic activity in the short run was an active research question in economic theory. Back then Say's Law ruled: since nobody produces for sale without intending to purchase, by "metaphysical necessity" planned spending must be equal to and could not be raised above or lowered below production. Thomas Malthus complained that this "Say-Ricardo doctrine" seemed sound in theory but did not appear to fit the world in practice, but he had no theoretical resolution to the problem.

As every even casual student of the history of economic thought knows, the question was definitively resolved by John Stuart Mill in 1829. Mill observed that people plan to spend their incomes not just on currently-produced goods and services, but also on financial assets. When economic agents in total plan to leverage up, planned spending in the short run is in excess of production--and then production rises and the economy booms. When economic agents in total plan to deleverage, planned spending in the short run is below production--and then production falls and the economy slumps.

DeLong Smackdown Watch: Origins of the British Industrial Revolution Analytical Mindos Edition...

My teacher Jeff Weintraub XXXXXXX@sas.upenn.edu writes, apropos of my review of Landes's Wealth and Poverty of Nations:

Hi Brad,

I war re-reading your review of David Landes's Wealth and Poverty of Nations, which you hoisted from the archives. It was good the first time around, and that holds up on re-reading. Re-reading it did remind one formulation that I found a little puzzling the first time around, so perhaps I might mention it to you now. It occurs in this passage:

I, at least, find myself wondering whether Britain's Industrial Revolution was a near-run thing--whether (as Adam Smith feared) the enormous burden of the Hanoverian régime fiscal-military state might not have nearly crushed the British economy like an egg stepped on by an elephant. Part of the answer is given by John Brewer's Sinews of Power, a work of true genius that lays out the incredible (for its time) efficiency of Britain's eighteenth-century fiscal-military state. Most of the answer is the Industrial Revolution…

But wasn't that the question. I think I see what you were getting at here, but I think the way you said it needed some refinement and clarification. (Or maybe I'm just missing something obvious?)

Cheers,

Jeff Weintraub

Dear Jeff--

Indeed. Infelicitous in the extreme, if not worse...

If I were rewriting it today, I would say that Britain was indeed on the knife-edge and that a return to the standard neo-Malthusian patterns of what John A. Hall and Ernst Gellner call Agraria was definitely a possible equilibrium path. I would say that two things pushed Britain up:

1. The extraordinary efficiency of Britain's fiscal-military state a la John Brewer.
2. The complexion of relative prices extraordinarily favorable for innovation in industry proper a la Robert Allen

And I would still reference Jeffrey Williamson's work on how substantial the drag caused by the fiscal-military state was during the Second Hundred Years' War…

And I might provide a caveat by referencing some of Michael Perelman's work on military orders from the Carron Iron Works and similar DARPA-like activities of the eighteenth century…

It looks like I will be in Philadephia on Friday, November 2…

Yours,

Brad DeLong

Professor of Economics J. Bradford DeLong
U.C. Berkeley
delong@econ.berkeley.edu
925 708 0467

Hoisted from the Archives (1998): Review of David S. Landes: "The Wealth and Poverty of Nations: Why Are Some So Rich and Others So Poor?"

Revie of David S. Landes: The Wealth and Poverty of Nations: Why Are Some So Rich and Others So Poor?:

David S. Landes, The Wealth and Poverty of Nations: Why Are Some So Rich and Others So Poor? (New York: W.W. Norton, 1998). 544 pp. ??. ISBN: 0393040178

David Landes has studied the history of economic development for more than half a century. His look at economic imperialism and informal empire in nineteenth-century Egypt (Bankers and Pashas) tells the story of how small were the benefits (either for Egyptian economic development or for the long-run power and happiness of the ruling dynasty) bought at extremely high cost by borrowing from European bankers. His unsurpassed survey of technological change and its consequences in Europe since 1750 (The Unbound Prometheus) remains the most important must-read book for serious students of the industrial revolution. His study of clock-making as an instance of technological development (Revolution in Time) provides a detailed look at a small piece of the current of technological development. His works are critical points-of-reference for those who seek to understand the Industrial Revolution that has made our modern world.

Now David Landes turns to the grandest question of all: the causes of the (so far) divergent destinies and relative prosperity levels of different national economies. The Wealth of Nations in the title echoes Adam Smith, but Landes is interested in both the wealth and poverty of nations: Adam Smith lays out what went wrong as the background for his picture of how things can go right, while Landes is as interested in the roots of relative--and absolute--economic failure as of success.

He pulls no punches--of Columbus's followers' treatment of the inhabitants of the Caribbean and the Americas, Landes writes that "nothing like this would be seen again until the Nazi Jew hunts and killer drives of World War II." Landes makes no compromises with any current fashion. Readers will remember how columnist after columnist decried high-school history standards (which, truth be told, were not very good) that required students to learn about a fourteenth-century African prince, Mansa Musa, but not about Robert E. Lee; readers of Landes will find three pages on Mansa Musa, and none on Massa Robert.

We are all multiculturalists now; or, rather, serious historians have long been multiculturalists.

Nevertheless, Landes's economic history is a profoundly Eurocentric history. It is Europe-centered without apologies--rather with scorn for those who blind themselves to the fact that the history of the past 500 years is Europe-centered.

Now Landes does not think that all history should be Eurocentric. For example, he argues that a history of the world from 500 to 1500 should be primarily Islamocentric: the rise and spread of Islam was an "explosion of passion and commitment... the most important feature of Eurasian history in what we may call the middle centuries."

But a history oriented toward understanding the wealth and poverty of nations today must be Eurocentric. Goings-on in Europe and goings-on as people in other parts of the world tried to figure out how to deal with suddenly-expansionist Europeans make up the heart of the story of how some--largely western Europe and northwest Europe's settler ex-colonies--have grown very, very rich.

Moreover, relative poverty in the world today is the result of failure on the part of political, religious, and mercantile elites elsewhere to pass the tests (rigged very heavily against them) of maintaining or regaining independence from and assimilating the technologies demonstrated by the people from Europe--merchants, priests, and thugs with guns in the old days, and multinationals, international agencies, and people armed with cruise missiles in these new days--who have regularly appeared offshore in boats, often with non-friendly intent. To try to tell the story of attempted assimilation and attempted rejection without placing Europe at the pivot is to tell it wie es eigentlich gewesen nicht.

Thus Landes wages intellectual thermonuclear war on all who deny his central premise: that the history of the wealth and poverty of nations over the past millennium is the history of the creation in Europe and diffusion of our technologies of industrial production and sociological organization, and of the attempts ot people elsewhere in the world to play hands largely dealt to them by the technological and geographical expansions originating in Europe.

He wins his intellectual battles--and not just because as author he can set up straw figures as his opponents. He wins because in the large (and usually in the small) he has stronger arguments than his intellectual adversaries, who believe that Chinese technology was equal to British until 1800, that had the British not appeared the royal workshops of Mughal India would have turned into the nucleus of an industrialized textile industry, that equatorial climates are as well-suited as mid-latitude climates to the kind of agriculture that can support an Industrial Revolution, that Britain's industrial lead over France was a mere matter of chance and contingency, or any of a host of other things with which Landes does not agree.

Landes's analysis stresses a host of factors--some geographical but most cultural, having to do with the fine workings of production, power, and prestige in the pre-industrial past--that gave Eurasian civilizations an edge in the speed of technological advance over non-Eurasian ones, that gave European civilizations an edge over Chinese, Arabic, Indian, or Indonesian, that made it very likely that within Europe the breakthrough to industrialization would take place first in Britain.

And by and large it is these same factors that have made it so damnably difficult since the Industrial Revolution for people elsewhere to acquire the modern machine technologies and modes of social and economic organization found in the world economy's industrial core.

Landes's account of why Eurasian civilizations like Europe, Islam, and China had an edge in technological development over non-Eurasian (and southern Eurasian) civilizations rests heavily on climate: that it is impossible for human beings to live in any numbers in "temperate" climates before the invention of fire, housing, tanning, and sewing (and in the case of northern Europe iron tools to cut down trees), but that once the technological capability to live where it snows has been gained, the "temperate" climates allowed a higher material standard of living.

I am not sure about this part of his argument. It always seemed to me that what a pre-industrial society's standard of living was depended much more on at what level of material want culture had set its Malthusian thermostat at which the population no longer grew. I have always been impressed by accounts of high population densities in at least some "tropical" civilizations: if they were so poor because the climate made hard work so difficult, why the (relatively) dense populations?

It seems to me that the argument that industrial civilization was inherently unlikely to arise in the tropics hinges on an--implicit--argument that some features of tropical climates kept the Malthusian thermostat set at a low standard of living, and that this low median standard of living retarded development. But it is not clear to me how this is supposed to have worked. I find the argument of Jared Diamond's Guns, Germs, and Steel more persuasive as an explanation of why Eurasian grasslands and neighboring forests have been the core of world civilization since the Neolithic Revolution.

By contrast, I find Landes's account of why Europe--rather than India, Islam, or China--to be very well laid out, and very convincing. But I find it incomplete. I agree that it looks as if Chinese civilization had a clear half-millennium as the world's leader in technological innovation from 500 to 1000. Thereafter innovation in China appears to flag. Little seems to be done in developing further the high technologies like textiles, communication, precision metalworking (clockmaking) that provided the technological base on which the Industrial Revolution rested.

It is far from clear to me why this was so: Chinese civilization in the millennium before the Ming dynasty appears to have been the most intellectually confident and technologically progressive on the globe. As Joel Mokyr pointed out in his Lever of Riches, any explanation--whether based on hydraulic oriental despotism or static Confucian culture--that attributes inertia to China's culture falls flat because it does not account for the dynamic of economic growth and technological progress under the Tang, Sung, and Yuan.

Moreover, simple appeals to an inward turn supported by confident cultural arrogance under the Ming and Ch'ing that led to stagnation leave me puzzled. Between 1400 and 1800 we think that the population of China grew from 80 million to 300 million. That doesn't suggest an economy of malnourished peasants at the edge of biological subsistence. That doesn't suggest a civilization in which nothing new can be attempted. It suggests a civilization in which colonization of internal frontiers and improvements in agricultural technology are avidly pursued, and in which living standards are a considerable margin above socio-cultural subsistance to support the strong growth in populations.

Yet somehow China's technological lead--impressive in printing and the handling of gunpowder in the thirteenth century, impressive in shipbuilding in the fifteenth century, impressive in porcelain-making in the seventeenth century--turned into a significant technological deficit in those same centuries that China's pre-industrial population quadrupled.

Landes's handling of the story of England's apprenticeship and England's mastership--of why the Industrial Revolution took place in the northwest-most corner of Europe--is perhaps the best part of the book. He manages to weave all the varied strands from the Protestant Ethic to Magna Carta to the European love of mechanical mechanism for its own sake together in a way that many attempt, but few accomplish.

Had I been Landes I would have placed more stress on politics: the peculiar tax system of Imperial Spain, the deleterious effect of rule by Habsburgs and Habsburg puppets on northern Italy since 1500 (and the deleterious effect of rule by Normans, Hohenstaufens, Valois, Aragonese, and Habsburgs on southern Italy since 1000), the flight of the mercantile population of Antwerp north into the swamp called Amsterdam once they were subjected to the tender mercies of the Duke of Alva, more on expulsions of Moriscos, Jews, and French Protestants (certainly the Revocation of the Edict of Nantes was an extraordinary shock to my seventeenth-century DeLong ancestors), the extraordinary tax burden levied on the Dutch mercantile economy by the cumulated debt of having had to spend from 1568 to 1714 fighting to achieve and preserve independence, and so forth.

I also would spend more time on Britain itself. I, at least, find myself wondering whether Britain's Industrial Revolution was a near-run thing--whether (as Adam Smith feared) the enormous burden of the Hanoverian fiscal-military state might not have nearly crushed the British economy like an egg stepped on by an elephant. Part of the answer is given by John Brewer's Sinews of Power, a work of true genius that lays out the incredible (for its time) efficiency of Britain's eighteenth-century fiscal-military state. Most of the answer is the Industrial Revolution. And some of the answer is (as Jeffrey Williamson has argued) that the burden of the first British Empire did indeed significantly slow--but not stop--industrialization.

I don't know what I think of all the issues in the interaction of the first British Empire, the British state, and British industrialization. Thus I find myself somewhat frustrated when Landes quotes Stanley Engerman and Barbara Solow that "It would be hard to claim that [Britain's Caribbean Empire was] either necessary or sufficient for an Industrial Revolution, and equally hard to deny that [it] affected its magnitude and timing," and then says "That's about it." I want to know Landes's judgment about how much. Everything affects everything else, and when economic historians have an advantage over others it is because they know how to count things--and thus how to use arithmetic to make judgments of relative importance.

But the complaint that a book that tries to do world history in 600 pages leaves stuff out is the complaint of a true grinch.

So where does Landes's narrative take us?

If there is a single key to success--relative wealth--in Landes's narrative, it is what science fiction writer David Brin calls the dogma of openness. First, openness is a willingness to borrow whatever is useful from abroad whatever the price in terms of injured elite pride or harm to influential interests. One thinks of Francis Bacon writing around 1600 of how three inventions--the compass, gunpowder, and the printing press--had totally transformed everything, and that all three of these came to Europe from China. Second, openness is a willingness to trust your own eyes and the results of your own experiments, rather than relying primarily on old books or the pronouncements of powerful and established authorities.

European cultures had enough, but perhaps only barely enough. Suppose Philip II Habsburg "the Prudent" of Spain and "Bloody" Mary I Tudor of England had together produced an heir to rule Spain, Italy, the Low Countries, and England: would Isaac Newton then have been burned at the stake like Giordano Bruno? Would the natural philosophers and mechanical innovators of seventeenth and eighteenth century England have found themselves under the scrutiny of the Inquisition? Neither Giordano Bruno, Jan Hus, nor Galileo Galilei found European culture in any sense "open."

If there is a second key, it lies in politics: a government strong enough to keep its servants from confiscating whatever they please, limited enough for individuals to be confident that the state is unlikely to suddenly put all they have at hazard, and willing once in a while to sacrifice official splendor and martial glory in order to give merchants and manufacturers an easier time making money.

In short, economic success requires a government that is, as people used to say, an executive committee for managing the affairs of the bourgeoisie--a government that is responsive to and concerned for the well-being of a business class, a class who have a strong and conscious interest in rapid economic growth. A government not beholden to those who have an interest in economic growth is likely to soon turn into nothing more than a redistribution-oriented protection racket, usually with a very short time horizon.

Landes writes his book as his contribution to the project of building utopia--of building a much richer and more equal world, without the extraordinary divergences between standards of living in Belgium and Bangladesh, Mozambique and Mexico, Jordan and Japan that we have today. Yet at its conclusion Landes becomes uncharacteristically diffident and unusually modest, claiming that: "the one lesson that emerges is the need to keep trying. No miracles. No perfection. No millennium. No apocalypse. We must cultivate a skeptical faith, avoid dogma, listen and watch well..."

Such a change of tone sells the book short, for there are many additional lessons that emerge from Landes's story of the wealth and poverty of nations. Here are five: (1) Try to make sure that your government is a government that enables innovation and production, rather than a government that maintains power by massive redistributions of wealth from its enemies to its friends. (2) Hang your priests from the nearest lamppost if they try to get in the way of assimiliating industrial technologies or forms of social and political organization. (3) Recognize that the task of a less-productive economy is to imitate rather than innovate, for there will be ample time for innovation after catching-up to the production standards of the industrial core. (4) Recognize that things change and that we need to change with them, so that the mere fact that a set of practices has been successful or comfortable in the past is not an argument for its maintenance into the future. (5) There is no reason to think that what is in the interest of today's elite--whether a political, religious, or economic elite--is in the public interest, or even in the interest of the elite's grandchildren.

It is indeed very hard to think about problems of economic development and convergence without knowing the story that Landes tells of how we got where we are today. His book is short enough to be readable, long enough to be comprehensive, analytical enough to teach lessons, opinionated enough to stimulate thought--and to make everyone angry at least once.

I know of no better place to start thinking about the wealth and poverty of nations.

: http://econ161.berkeley.edu/Econ_Articles/Reviews/landes.html#anchor2077092

"Hopeless Unemployment" by J. Bradford DeLong | Project Syndicate

"Hopeless Unemployment" by J. Bradford DeLong | Project Syndicate: BERKELEY – However bad you think the global economy is today in terms of the business cycle, that is only one lens through which to view the world. In terms of global life expectancy, total world wealth, the overall level of technology, growth prospects in emerging economies, and global income distribution, things look rather good, while on still other dimensions – say, global warming or domestic income inequality and its effects on countries’ social solidarity – they look bad.

Even on the business-cycle dimension, conditions have been far worse in the past than they are today. Consider the Great Depression and the implications of market economies’ inability back then to recover on their own, owing to the burden of long-term unemployment.

But, while we are not at that point today, the Great Depression is no less relevant for us, because it is increasingly likely that long-term unemployment will become a similar impediment to recovery within the next two years.

At its nadir in the winter of 1933, the Great Depression was a form of collective insanity. Workers were idle because firms would not hire them; firms would not hire them because they saw no market for their output; and there was no market for output because workers had no incomes to spend.

By that point, a great deal of unemployment had become long-term unemployment, which had two consequences. First, the burden of economic dislocation was borne unequally. Because consumer prices fell faster than wages, the welfare of those who remained employed rose in the Great Depression. Overwhelmingly, those who became and remained unemployed suffered the most.

Second, reintegrating the unemployed even into a smoothly functioning market economy would prove to be very difficult. After all, how many employers would not prefer a fresh entrant into the labor force to someone who has been out of work for years? The simple fact that an economy had recently undergone a period of mass unemployment made it difficult to recover levels of growth and employment that are often attained as a matter of course.

Devalued exchange rates, moderate government budget deficits, and the passage of time all appeared to be equally ineffective remedies. Highly centralized and unionized labor markets, like Australia’s, did as poorly as decentralized and laissez-faire labor markets, like that of the United States, in dealing with long-term unemployment. Fascist solutions were equally unsuccessful, as in Italy, unless accompanied by rapid rearmament, as in Germany.

In the end, in the US, it was the approach of World War II and the associated demand for military goods that led private-sector employers to hire the long-term unemployed at wages they would accept. But, even today, economists can provide no clear explanation of why the private sector could not find ways to employ the long-term unemployed in the near-decade from the winter of 1933 to full war mobilization. The extent of persistent unemployment, despite different labor-market structures and national institutions, suggests that theories that pinpoint one key failure should be taken with a grain of salt.

At first, the long-term unemployed in the Great Depression searched eagerly and diligently for alternative sources of work. But, after six months or so passed without successful reemployment, they tended to become discouraged and distraught. After 12 months of continuous unemployment, the typical unemployed worker still searched for a job, but in a desultory fashion, without much hope. And, after two years of unemployment, the worker, accurately expecting to be at the end of every hiring queue, had lost hope and, for all practical purposes, left the labor market.

This was the pattern of the long-term unemployed in the Great Depression. It was also the pattern of the long-term unemployed in Western Europe at the end of the 1980s. And, in a year or two, it will be the pattern again for the long-term unemployed in the North Atlantic region.

I have been arguing for four years that our business-cycle problems call for more aggressively expansionary monetary and fiscal policies, and that our biggest problems would quickly melt away were such policies to be adopted. That is still true. But, over the next two years, barring a sudden and unexpected interruption of current trends, it will become less true.

The current balance of probabilities is that two years from now, the North Atlantic’s principal labor-market failures will not be demand-side market failures that could be easily remedied by more aggressive policies to boost economic activity and employment. Rather, they will be structural market failures of participation that are not amenable to any straightforward and easily implemented cure.

Brazil Conference Blogging: Designing the Future: The Next Ten Years...

Exame.com:

Real pode ser moeda internacional, diz Eichengreen - EXAME.com: Rio - Brasil e Índia são as apostas do economista Barry Eichengreen, professor de Economia e Ciências Políticas da Universidade da Califórnia (UC), em Berkeley, para fornecerem moedas de reserva internacional num prazo de 10 ou 20 anos. Em apresentação no seminário "O Brasil e o mundo em 2022", nesta segunda-feira, no Rio, Eichengreen discorreu sobre as dificuldades dos Estados Unidos, sua perda de peso relativo na economia global e como isso afeta o dólar e os sistemas financeiros...

July 23: 2:30 PM: We have many more excellent speakers to hear over the next two days time. Therefore let me skip my remarks on the BNDES, on the great city of the River of January, on Tom Jobim, and also João Gilberto and Johnny Alf, the bossa nova, and the 50th anniversary of the composition of "Garota de Ipanema".

Let me instead jump right into the economics:

The purpose of this conference is to bring together smart and thoughtful people many of whom spend less time listening to each other than they should, and ask them how to design our future. The Brazilian Development Bank designs--in fact we all design our futures, only not under conditions of our own choosing. The future that Brazilians and the Brazilian Development Bank will attempt to design for themselves are enabled, influence, and constrained by the futures other regions of the globe are attempting to design as well..

And here I find myself at a quandary. I do not understand the future that the North Atlantic, the global North, is designing for itself.

Five years ago I would have confidently predicted that the North Atlantic industrial core of the global economy would continue on its relatively-smooth path of 5%/year growth in nominal GDP, 7%/year growth in nominal imports and exports, with about 2.5%/year of real GDP growth and 2.5%/year of inflation in both the dollar and the euro, and with interest rates and asset prices undergoing no major and few minor disturbances--with perhaps the then-anticipated slow deflation of the property bubble and the gradual unwinding of the global imbalance of East Asia's surplus as minor disturbing factors. The 1930s and 1940s had, I thought, taught the North Atlantic both the political urgency of avoiding mass unemployment and the demand-management tools to do so. The 1970s had, I thought, taught the North Atlantic both the political urgency of avoiding chronic even moderate-level inflation nd the demand-management tools to do so.

I was wrong. Wow! I was wrong.

Barry Eichengreen of the University of California at Berkeley, the National Bureau of Economic Research, and the Center for Economic Policy Research is without a doubt the world's leading expert on the international monetary economics of the Great Depression of the 1930s and, by virtue of that expertise, an expert on today. He is the only one still living of the four economists--Bagehot, Minsky, Kindleberger, and Eichengreen--whom last year Larry Summers told Martin Wolf knew the most about what has happened to the world economy since 2007.

Wolfgang Munchau of the Financial Times is one of the very, very best real-time observers of the global economy we have. On the phone to me last week Paul Krugman expressed envy at how he could not write the kinds of columns that Wolfgang could write and had the freedom to write for the Financial Times. Three months ago at breakfast Wolfgang's boss Gillian Tett described him as one of the invaluable contributors to the FT that keeps it at the very top of the financial-journalistic league table.

But first--roll the video...

Barry Eichengreen?

[Later] Friday afternoon I took a look at Barry's PowerPoint and was terrified--I did not see how he could do it in less than an hour. But he did. That was remarkable. I do find myself running backward in time: US dollar, British pound, Florentine florin, Venetian ducat, and then i get back to the Byzantine bezant under the reign of Irene Autocratix, who called herself equal to the Apostles--isoapostoles.

Wolfgang Munchau?

[Later] It was British 19th C. Romantic author Thomas Carlyle who famously complained that economists were no fun: dismal scientists. We have a couple of truly dismal scientists, here. Let me see if I can get either of these panelists to be more optimistic. Barry Eichengreen, if I could ask you--in two to five minutes--in your opinion, what did Wolfgang Munchau get wrong in the sense of being too gloomy?

[Later] Wolfgang Munchau, if I could now ask you, what in your opinion did Barry Eichengreen get right and what did he get wrong?

[Later] Before I ask for questions from the floor, I have a few questions of my own…

[Later] Questions from the floor?

[Later] That's the end of our time, and while I perhaps need coffee more than most--I left my home at 5 am yesterday yet did not get to Rio until noon today--the rule is that in Brazil you should never give up the chance to drink coffee…

July 23: 4:30 PM: It is now time for our second panel. If I might have your attention, please…

Let me start with two threads. The first--call it the neoliberal bet. The neoliberal bet starts from the observation that the market-heavy version of social democracy that evolved in the United States under the Progressive Republican President Roosevelt at the start of and the New Deal Democrat President Roosevelt in the middle of the twentieth century, and then spread to Western Europe after 1945 out of fear of Josef Stalin and desire to emulate Henry Ford. That--mode of production doesn't quite cover it--seemed to be the best institutional configuration for material prosperity and soft government we have yet seen. The neoliberal bet is the strong urging by the NAtl that other countries should emulate large chunks of its institutional setup and the promise that the NAtl economies will be prosperous and open enough to be importers of last resort--that what emerging markets make, the NAtl will buy. The conclusion i drew from the first panel is that the NAtl is drifting in the direction of welshing on its commitment to be the prosperous importer of last resort, as evidenced by a US presidential campaign in which two candidates who by advisors and intellectual pedigree are committed to free trade--these two candidates are competing to make the biggest product that no commodity currently produced in the US today will ever be produced in China...

In the very long-run sweep of history, Eurasian civilizations find themselves densest in first three and then four core regions--regions with rainfall and river valleys that provided sufficient water for the largest-scale effective farming. These are: East Asia--China--South Asia--India--the Fertile Crescent--the Arab Middle East--and, after the invention of the iron axe, the river valleys of northwest Europe. These economies have, since the invention of agriculture, dominated Eurasia and usually the world.

This session discusses the future economo-politic trajectories of two of these Eurasian core economies: China and the Arab world. Before the era of the Industrial Revolution these two core economies were crucial. It was only four centuries ago that we saw not English-speaking armies camped around Baghdad but a Turkish- and Arabic-speaking army camped around Vienna. The Ming Dynasty's voyages of exploration in the fifteenth century under Zheng He travelled as far as the Portuguese expeditions launched by the Infante Dom Henrique o Navegador--and did so with 20 times the number of ships.

Much of the history of the twenty-first century will be the return of these regions to their traditional relative influence within Eurasia--or their failure to do so, and the political consequences of economic events, and the economic consequences of political events.

We have asked Dr. FAN Gang and Ambassador Alfonso Celso de Ouro Preto here this afternoon. Among the ambassador's many accomplishments: being Brazil's Ambassador at Large to the Middle East from 2004-2009. They will speak on what futures China and the region that Europeans call the "Middle East" are going to design for themselves

Dr. Fan Gang of the National Institute of Economic Research is also Chairman of the China Reform Foundation. He is one of the world's top 100 global thinkers, according to Foreign Policy magazine.

Fan Gang? China: growth and overtaking, or relative stagnation a la Japan? Asset markets? Financial fragility? The drive to high mass consumption? International integration?

[Later] Mr. Ambassador? State, religion, society, and economy? The peculiar role of oil?

[Later] I know that there are many questions from the floor, but I am going to keep control of the microphone for a little while…

[Later] Questions from the floor?

[Later] And that reaches the end of our time for this panel. It is now too late for coffee--but it is not too early for cocktails

Noah Smith Needs Backup: Hoisted from the Archives: Sources of Austrian Confusion

Noah Smith ventures deep into the weeds where people talk about good German engineers and bad Jewish financiers:

Noahpinion: Inflation for the People: For the past few weeks I've been getting acquainted with the popular wing of the "Austrian economics" movement. First I discovered the Bizarro Economics World of online forums, then I got re-acquainted with Zero Hedge, which seems to have taken a more and more inflationista/goldbuggy/Austrian tone in recent years.  Then a bunch of Texan friends started posting "End the Fed!" memes to my Facebook feed. So I went on Facebook and I asked: "Why do people want to end the Fed?"

Getting the Biggest Bang for the Buck from Fiscal Policy: Federal Lines of Credit: Miles Kimball Should Talk to Josh Hausman Department

Miles Kimball writes:

Getting the Biggest Bang for the Buck in Fiscal Policy: Last week, on Monday, May 14, I was one of ten outside academics invited to present a briefing to the Board of Governors of the Federal Reserve on the topic of consumption…. I proposed an addition to the toolkit of fiscal policy: “Federal Lines of Credit” or FLOC’s…. Imagine that the economy is in a recession…. What if instead of giving each taxpayer a $200 tax rebate, each taxpayer is mailed a government-issued credit card with a $2,000 line of credit?… [B]ecause taxpayers have to pay back whatever they borrow… the cost to the government in the end—and therefore the ultimate addition to the national debt—should be smaller. Since the main thing holding back the size of fiscal stimulus in our current situation has been concerns about adding to the national debt, getting more stimulus per dollar added to the national debt is getting more bang for the buck….

Austerity and traditional fiscal stimulus can only be reconciled by the difficult two-step of spending more or taxing less now while promising to spend less or tax more in the future.  By contrast, it is perfectly possible to combine an immediate or relatively-quickly-phased-in austerity program with the issuance of large national lines of credit to counteract the negative aggregate demand effects of the austerity program….

The interesting thing is that we have done this before. In 1931 and 1936 the Congress (over the objections of President Hoover in the first case and President Roosevelt in the second) gave World War I veterans the option to borrow against the WWI Veterans' Bonus that they were going to be paid in the future:

Joshua Hausman:

The Veterans’ Bonus of 1936 (Work in Progress): Conventional wisdom has it that in the 1930s fiscal policy did not work because it was not tried. In fact, this paper shows that fiscal policy, though inadvertent, was tried in 1936, and a variety of evidence suggests it worked. A deficit-financed veterans’ bonus provided 3.2 million World War I veterans with cash and bond payments totaling 2 percent of GDP; the typical veteran received a payment equal to annual per-capita personal income.

This paper uses time-series and cross-sectional data to identify the effects of the veterans’ bonus. I exploit four sources of quantitative evidence: a detailed household consumption survey, cross-state regressions, aggregate monthly time-series, and a previously unknown American Legion survey of veterans. The evidence paints a consistent picture in which veterans quickly spent the majority of their bonus. Spending was concentrated on housing, cars, and other durable and semi-durable goods. Contemporary narrative accounts support these quantitative results.

Because the bonus was paid to veterans and only veterans, Josh has substantial cross-section identification off of the different proportions of veterans in the several states. The (preliminary) figures and regression results are, to my eye, awesome: a cash-flow multiplier that looks to be 0.8 or so.

Federal Lines of Credit are an extraordinarily effective recession-fighting policy when mental accounts or liquidity constraints are important, and it looks as though they were very important in the 1930s.

---

Note, also, Josh Hausman's other depression-era paper in progress: an estimate that an adverse supply shock--the refusal of the governors of the midwest to turn the firehouses on sit-down strikers--reduced U.S. real GDP growth in 1938 by 1.2% points…

The Changing Structure of the Economy

Twitter / JustinWolfers:

Meta-observation: Economists too often claim that the BLS is getting seasonal adjustments wrong, and too rarely note the economy is changing

Indeed: the seasonal adjustment factor in the employment-to-population ratio.

Eric Platt: U.S. June Payrolls Expand by 80K

From Business Insider…

A catastrophe in the sense only that the situation is a catastrophe: does not make matters worse in any respect…

---

All generalizations about the character of recessions and recoveries in the post-WWII period are now inoperative.

Thank you.

Hoisted from the Archives (2010): Mr. Hicks and "Mr Keynes and the 'Classics': A Suggested Interpretation

Mr. Hicks and "Mr Keynes and the 'Classics': A Suggested Interpretation":

In his "Mr. Keynes and the 'Classics': A Suggested Interpretation," John Hicks says that he is building a model of John Maynard Keynes's General Theory of Employment, Interest and Money. He is not. What he is actually doing is creating a framework that combines the monetarist theories of Irving Fisher, the financial-market insights of Knut Wicksell, and the multiplier insights of Richard Kahn into one package.

Irving Fisher had a model with two commodities: the flow of goods-and-services currently being produced on the one hand and the economy's stock of "money"--of liquid assets generally accepted as and held in people's portfolios because of their usefulness as means of payment. Excess demand for money was, by Walras's Law, associated with excess supply of goods and services--and thus with falling production, employment, capacity utilization, and consumer prices. Excess supply of money was, by Walras's Law, associated with excess demand for goods and services--and rising production, employment, capacity utilization, and consumer prices. In Fisher's framework the way to restore the economy to full-employment balance is to boost or shrink the money stock to its proper level, via gold mining, gold shipments, open-market operations, internal drains or the reverse, or changes in bank reserve-to-deposit ratios. Return the money stock to it's proper full-employment equilibrium value and you have solved yours depression problem.

Knut Wicksell had a model with two commodities: the flow of goods-and-services currently being produced, on the one hand, and the stock of bonds on the other. Excess demand for bonds--a "market" rate of interest above the "natural" rate of interest that balanced demand for and supply of bonds at full employment--was associated with excess supply of goods and services, ewe deter. Excess supply of bonds--a "market" rate of interest lower than the "natural" rate--was associated with excess demand for goods and services, et cetera.

Wicksell paid special attention to dynamics: an excess demand for bonds that sets in motion a decline in the price level would, he thought, drive the natural rate of interest down: seeing deflation and expecting more deflation, businesses would be loath to issue more bonds unless they could do so on very good terms indeed. Thus the gap between the (nominal) market and the natural rate of interest would increase--the disequilibrium would widen--as the market system reacted to the initial depression-causing disequilibrium. This cumulative process, as Wicksell called it, meant that at least over a range the economy was unstable: depression begat greater depression, and boom begat greater boom.

By contrast, Fisher's dynamics were at least to some degree stabilizing: a depression produces a deflation which raises the real money stock and so diminishes the excess demand for money. (With expected inflation and leverage-induced deflation bankruptcies a complicating factor.)

Richard Kahn had yet another analysis: consumption spending depends positively on income; production is the sum of consumption spending and autonomous spending; and--by Walras's Law once again--total income equals total production. Thus, Kahn thought, a reduction in autonomous spending would reduce production and income--and that reduction in income would reduce consumption spending, which would set off another round of reductions in production and income.

Irving Fisher's monetarism had two commodities--"money" and "goods-and-services"--and one price-that-moved, the consumer price level. The key to fixing depressions was to get the consumer price level to the right level given the nominal money stock (or, preferably), to get the money stock to the right value given the price level). Knut Wicksell's flow-of-funds model also had two commodities--"bonds" and "goods-and-services"--and one price-that-moved: the (nominal) market interest rate. The key to fixing depressions was to get the banking system to set the market interest rate at a value that matched the natural interest rate at which savings equalled investment at full employment and thus demand equalled supply in the market for goods-and-services. Richard Kahn's multiplier analysis had one commodity, goods-and-services, and had no prices: just a dependence on consumption spending on income and an assertion that income equalled spending.

Hicks's "Mr. Keynes and the 'Classics'" throws all these together into a stewpot, mixes them together, and cooks them up in a formally-consistent way: three commodities--goods-and-services, money, and bonds--two prices that can move--the interest rate and the consumer price level--and the multiplier in the form of the dependence of savings on total income which is the amount of production and spending in the goods-and-services market. And it works. That is what has made it such an effective workhorse for thinking about depressions in the real world for three generations now.

But what does all this have to do with John Maynard Keynes and his General Theory? Keynes was very anxious not to get tied down to any particular formalism--either the one he set out in the General Theory or Hicks's IS-LM. Instead, he wrote in the 1937 Quarterly Journal of Economics:

I am more attached to the comparatively simple fundamental ideas which underlie my theory than to the particular forms in which I have embodied them, and I have no desire that the latter should be crystallised at the present stage of the debate. If the simple basic ideas can become familiar and acceptable, time and experience and the collaboration of a number of minds will discover the best way of expressing them. I would, therefore, prefer to... re-express some of these ideas....

[W]e have, as a rule, only the vaguest idea of any but the most direct consequences of our acts. Sometimes we are not much concerned with their remoter consequences.... But sometimes we are intensely concerned with them.... Now of all human activities which are affected by this remoter preoccupation, it happens that one of the most important is economic in character, namely, wealth. The whole object of the accumulation of wealth is to produce results, or potential results, at a comparatively distant, and sometimes indefinitely distant, date. Thus the fact that our knowledge of the future is fluctuating, vague and uncertain, renders wealth a peculiarly unsuitable subject for the methods of the classical economic theory. This theory might work very well in a world in which economic goods were necessarily consumed within a short interval of their being produced. But it requires, I suggest, considerable amendment if it is to be applied to a world in which the accumulation of wealth for an indefinitely postponed future is an important factor....

By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only slightly uncertain.... The sense in which I am using the term is that in which the prospect of an European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth-owners in the social system in 1970. About these matters their is no scientific basis on which to form any calculable probability whatever. We simply do not know. Nevertheless, the necessity for action and for decision compels us as practical men to do our best to overlook this awkward fact and to behave exactly as we should if we had behind us a good Benthamite calculation.... How do we manage?... (1) We assume that the present is a much more serviceable guide to the future than a candid examination of past experience would show it.... (2) We assume that the existing state of opinion as expressed in prices and the character of existing output is based on a correct summing up of future prospects.... (3) Knowing that our individual judgment is worthless, we endeavour to fall back on the judgment of the rest of the world which is perhaps better informed....

Now a practical theory of the future based on these three principles has certain marked characteristics. In particular, being based on so flimsy a foundation, it is subject to sudden and violent changes. The practice of calmness and immobility, of certainty and security, suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct.... At all times the vague panic fears and equally vague and unreasoned hopes are not really lulled, and lie but a little way below the surface.

Perhaps the reader feels that this general, philosophical disquisition... is somewhat remote from the economic theory.... But I think not.... [O]ur first step must be to elucidate more clearly the functions of money... money of account... facilitates exchanges... is a convenience... devoid of significance.... [Money as] a store of wealth.... But in the world of the classical economy, what an insane use to which to put it! For it is a recognised characteristic of money as a store of wealth that it is barren; whereas practically every other form of storing wealth yields some interest or profit. Why should anyone outside a lunatic asylum wish to use money as a store of wealth?

Because... our desire to hold Money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future.... The significance of this characteristic of money has usually been overlooked; and in so far as it has been noticed, the essential nature of the phenomenon has been misdescribed. For what has attracted attention has been the quantity of money which has been hoarded... supposed to have a direct proportionate effect on the price level through affecting the velocity of circulation. But the quantity of hoards can only be altered either if the total quantity of money is changed or if the quantity of current money income (I speak broadly) is changed; whereas fluctuations in the degree of confidence are capable of... modifying... the premium which has to be offered to induce people not to hoard. And changes in... liquidity preference... affect, not [consumer] prices, but the rate of interest....

The owner of wealth, who has been induced not to hold his wealth in the shape of hoarded money, still has two alternatives.... He can lend his money at the current rate of money interest or he can purchase some kind of capital asset.... The prices of capital assets move until, having regard to their prospective yields... they offer an equal apparent advantage to the marginal investor.... This does not mean, of course, that the rate of interest is the only fluctuating influence on these prices. Opinions as to their prospective yield are themselves subject to sharp fluctuations, precisely for... the flimsiness of the basis of knowledge on which they depend.... It is not surprising that the volume of investment, thus determined, should fluctuate widely from time to time. For it depends on two sets of judgments about the future, neither of which rests on an adequate or secure foundation—on the propensity to hoard and on the opinions of the future yield of capital assets.... This completes the first chapter of the argument, namely, the liability of the scale of investment to fluctuate for reasons quite distinct (a) from those which determine the propensity of the individual to save out of a given income and (b) from those physical conditions of technical capacity to aid production....

My next difference from the traditional theory concerns its apparent conviction that there is no necessity to work out a theory of demand and supply of output as a whole. Will a fluctuation in investment, arising for the reasons just described, have any effect on the demand for output as a whole, and consequently on the scale of output and employment? What answer can the traditional theory make to this question? I believe that it makes no answer at all, never having given the matter a single thought.... My own answer... involves... investment expenditure... consumption expenditure... [which] depends mainly on the level of income.... [T]he consequences which follow from [this multiplier] are at the same time unfamiliar and of the greatest possible importance.... [A]ggregate output depends on the propensity to hoard, on the policy of the monetary authority as it affects the quantity of money, on the state of confidence concerning the prospective yield of capital assets, on the propensity to spend and on the social factors which influence the level of the money wage. But of these several factors it is those which determine the rate of investment which are most unreliable, since it is they which are influenced by our views of the future about which we know so little. This that I offer is, therefore, a theory of why output and employment are so liable to fluctuation. It does not offer a ready-made remedy as to how to avoid these fluctuations and to maintain output at a steady optimum level....

Naturally I am interested not only in the diagnosis, but also in the cure.... But I consider that my suggestions for a cure, which, avowedly, are not worked out completely, are on a different plane from the diagnosis. They are not meant to be definitive; they are subject to all sorts of special assumptions and are necessarily related to the particular conditions of the time. But my main reasons for departing from the traditional theory go much deeper than this. They are of a highly general character and are meant to be definitive.

I sum up, therefore, the main grounds for my departure as follows: (1) The orthodox theory assumes that we have a knowledge of the future of a kind quite different from that which we actually possess.... (2) The orthodox theory... ignored the need for a theory of the supply and demand for output as a whole. I doubt if many modern economists really accept Say’s Law that supply creates its own demand. But they have not been aware that they were tacitly assuming it...

The Last Communists...

Francis Spufford, Red Plenty, conclusion:

There was a bench by the wall at the end of the dacha's grounds, overlooking a wheat field. Sometimes tourists came walking along the field path, and wanted to have their pictures taken with him, when they found the former First Secretary [Nikita Sergeyevich Khrushchev] sitting there. Nobody was on the path today. There was only the grey heat of August, and himself sitting in his shirt and his hat, with his shortwave radio and the tape recorder his son had given him to record his memoirs….

[…]

It was worst if he was stupid enough ever to watch a war film…. [T]here were things to be proud of, after all, about the war. All those brave boys they had bludgeoned on toward the enemy--well, the bravery had been real as well as the bludgeoning; real enough to make you weep. And they had rid the world of a great evil. That was true….

It was later that it would all turn poisonous: in the night. He would dream… out would come the other memories…. [T]he groaning trees in the western Ukraine in '45, when the NKVD hangmen had done their work, and the sight through an incautiously opened door in '37 where an interrogator had been demonstrating the possibilities of a simple steel ruler, and the starveling child vomiting grass during collectivization. And more. And worse.

So much blood, and only one justification for it. Only one reason it could have been all right to have done such things… if it had been all prologue, all only the last spasms of death in the old, cruel world…. Today the radio was reporting that Budapest had come round again, just like the time he sent the tanks in; only this time it was Prague…. He fumbled with the tape machine… found the RECORD key….

"Paradise", he told the wheat field in baffled fury,

is a place where people want to end up, not a place they run from. What kind of socialism is that? What kind of shit is that, when you have to keep people in chains. What kind of social order? What kind of paradise?…

And then… the retired monster sat very still on the bench by the field….

Three thousand kilometers east it is already night… Leonid Vitalevich [Kantorovich] is sitting by himself optimizing the manufacture of steel tubes. Five hundred producers. Sixty thousand consumers. Eight hundred thousand allocation orders to be issued each year. But it would all work out if he could persuade them to measure output in correct units…

Convergence: 1960-2008

There are four key facts you must know about the economic history of post-WWII world:

1. The world as a whole is much richer than it was two generations ago: since 1950, average worldwide growth of 2%/year in GDP per capita adds up--say 3.5 times as rich as it used to be.

2. Looking across nations, the world is a more unequal place than it was two generations ago: your typical gap between one nation's standard of living and another's is larger.

3. The average gap between a random nation's standard of living and the U.S. standard of living is the same as it was two generations ago.

4. The average gap between a random person's standard of living and the U.S. standard of living is the same as it was two generations ago--for two of the countries that have done well over the past generation are China and India, which together are 40% of humanity.

A Note from Maury Obstfeld on Kindleberger, Hegemony, and Speculation

In my inbox, from Maury:

Nice piece...

I would just underscore 2 points:

Hegemony means deep pockets, and a domestic politics capable of internalizing the benefits from systemic stability so that the hegemon is in a position to provide fiscal resources in support of the system. The euro zone has a centralized monetary authority, but treaty provisions have intentionally hobbled it from playing a fiscal support role (including through seigniorage).

Second, modern macro as we knew it before 2007 ignored the financial plumbing at the heart of the crisis. But pre-crisis finance papers such as Shleifer-Vishny's "Limits of Arbitrage" provide the most convincing response to Friedman['s claims that destabilizing speculation is impossible] ... if only they had been integrated into macro models...

Alan Taylor adds:

We are on the brink of repeating 1931 with a banking/financial sector that is N times larger relative to advanced country GDP, where N is at least 2 in many countries and even bigger in some key countries. Until sometime in the last year I used to console myself that this was compensated for by the fact that our macro policy making system was M times more flexible/intelligent than what we had back then with M>>N.

Hoisted from the Archives: In Praise of Volumes 1 and 2 of Robert Skidelsky's Biography of John Maynard Keynes

Robert Skidelsky's Biography of John Maynard Keynes: Archive Entry From Brad DeLong's Webjournal; August 06, 2004: Robert Skidelsky (1983), John Maynard Keynes: Hopes Betrayed (London: Macmillan: 033357379x). Robert Skidelsky (1992), John Maynard Keynes: The Economist as Saviour (London: Macmillan: 0333584996). Sitting next to Lord Skidelsky in the Sala Maggioranza of the Italian Treasury (after they turned off the air conditioning, I took off my tie when he took off his jacket) impelled me to reread his Keynes biography. And, after rereading, I find that I cannot improve on what I wrote about them three years ago: my thoughts then were totally enthusiastic and totally adulatory. And my thoughts are the same now. (I haven't yet reread volume three, about which I am less enthusiastic). In his first two volumes, Skidelsky gives us John Maynard Keynes's life, in all its dimensions. And he does so with wit, charm, control, scope, and enthusiasm. You read these books and you know Keynes--who he was, what he did, and why it was so important.

The place to start is with Skidelsky's observation that John Maynard Keynes appeared to live more lives than any of the rest of us are granted.

Keynes was an academic, but also a popular author. His books were read much more widely outside of academia than within it. Keynes was a politician--trying to advance the chances of Britain's Liberal Party between the wars--but also a bureaucrat: at times a key civil servant in the British Treasury. He was a speculator, trying to make his fortune on the stock market, but also at the core of the "Bloomsbury Group" of artists and intellectuals that did so much to shape interwar culture.

For the litterati it is Keynes of Bloomsbury--his loves, enthusiasms, acts of patronage, and wit--who is the most interesting. For economists like myself, it is Keynes the academic who is the real Keynes: he was the founder of the half-science half-witchcraft discipline of macroeconomics. For those interested in the political and economic history of the twentieth century, it is Keynes the author and politician who is primary. In either case, John Maynard Keynes is the man who has the best claim to be the architect of our modern world--whether it is how our central banks think about economic policy, what our governments believe that they must try to do, the institutions through which they work, or the habit of thought that views the economy not as Adam Smith's "system of natural liberty" but as a complicated machine that needs adjustment and governance, all of these trace large parts of their roots to the words and deeds of John Maynard Keynes.

How did this man come to be?

That is the question answered by the first volume of Skidelsky's biography: Hopes Betrayed. Hopes Betrayed is a bildungsroman, a story of growth and development. Skidelsky writes the best narrative interpretation of growing up as a smart and privileged children of academics in late Victorian Britain than I can ever conceive of being written. He writes of how Keynes was one of a relatively small number of brilliant students thrust as a leaven into the mass of Britain's upper class at Eton, and thus became part of "an intellectual elite thrust into the heart of a social elite" (HB, page 77). An entire cohort of Britain's upper class thus learned before they were twenty that Keynes could be very smart, very witty, very entertaining--and very helpful if there was a hard problem to be thought through or something to be done.

Skidelsky then writes of Keynes at Cambridge, his joining the secret society of the Apostles, and his eager grasping with both hands of the philosophy of the aesthete common among the students of the philosopher G.E. Moore. As Keynes put it in 1938, he believed that one should arrange one's life to achieve the most good, where "good" was nothing more or less than

states of mind... states of mind... not associated with action or achievement or with consequences [but]... timeless, passionate states of contemplation and communion…. a beloved person, beauty, and truth.

Thus Keynes left Cambridge convinced that "one’s prime objects in life were love, the creation and enjoyment of aesthetic experience, and the pursuit of knowledge. Of these love came a long way first..." (HB, page 141).

This embrace of aestheticism was and remained the key to the "Bloomsbury" avatar of John Maynard Keynes, for whom the lodestars were to "be in love with one’s friends, with beauty, with knowledge" and who was and remained an enthusiastic member of the Bloomsbury group, sharing "its intellectual values and its artistic enthusiasms," and participating "in its wild fancy dress parties" (HB, page 234). Keynes was a man who could celebrate this appointment to the British Treasury with

…a party for seventeen… at the Café Royale.... Afterwards they went back to 46 Gordon Square for Clive [Bell]’s and Vanessa [Bell, the sister of Virgina Woolf]’s party. There they listened to a Mozart trio... and went upstairs for the last scene of a Racine play performed by three puppets made by Duncan [Grant], with words spoken by the weird-voiced Stracheys. ‘The evening ended with Gerald Shove enthroned in the center of the room, crowned with roses...’ (HB, page 300).

But at the same time Keynes's pursuit of knowledge was shading over into politics and policy as well. For Keynes it was never enough to pursue knowledge in order to achieve a good state of mind, one had also to be sure to cause the knowledge to be applied to make the world a better place. And how one could act in politics and policy was greatly constrained by the limits of our knowledge. One argument from Edmund Burke, especially resonated with Keynes. As he wrote:

Burke ever held, and held rightly, that it can seldom be right... to sacrifice a present benefit for a doubtful advantage in the future.... It is not wise to look too far ahead; our powers of prediction are slight, our command over results infinitesimal. It is therefore the happiness of our own contemporaries that is our main concern; we should be very chary of sacrificing large numbers of people for the sake of a contingent end, however advantageous that may appear... We can never know enough to make the chance worth taking... (ES, page 62).

Keynes's industry and intelligence thus made him a trusted and effective member of Britain's intellectual and administrative elite well before the eve of World War I. Sir Edwin Montagu, especially, pushed him forward both before and during the war. Before the war Keynes decided that he wanted the life of an academic rather than of an administrator: Cambridge rather than the India Office or the Treasury. Yet he kept a strong presence in both worlds, writing his practical and policy-oriented book Indian Currency and Finance in spare moments as he worked on the deeper and philosophical project that was his Treatise on Probability.

Thus it was no surprise that Keynes found an important and powerful job at the Treasury during the national emergency that was World War I. How do you mobilize the financial resources of Britain to support the war effort? How large a war effort could the British economy stand? How could an international trade system geared to consumer satisfaction be harnessed as an instrument of national power? These are all deep and complicated questions. These are what Keynes worked on. But as the death toll from World War I mounted up toward ten million, Keynes became angrier and angrier at this monstrous botch of human lives and social energy that was World War I--and angrier and angrier at the politicians who could see no way forward other than mixing more blood with mud at Paaschendale.

Keynes's friend David Garnett wrote him a letter condemning his work for the government, calling Keynes

an intelligence they need in their extremity.... A genie taken incautiously out... by savages to serve them faithfully for their savage ends, and then--back you go into the bottle.... Oh... our savages are better than other savages.... But don’t believe in the profane abomination.

The interesting thing was that Keynes "agreed that there was a great deal of truth in what I had said..." (HB, page 321). And then the whole project of post-World War I reconstruction went wrong at Versailles--when the new German government was treated as a foe rather than a democratic ally, when the object seemed to be to extract as much in plunder and reparations from Germany as possible ("until the pips squeak").

Skidelsky quotes South African politician Jan Christian Smuts on the atmosphere at Versailles:

Poor Keynes often sits with me at night after a good dinner and we rail against the world and the coming flood. And I tell him that this is the time for Grigua’s prayer (the Lord to come himself and not to send his Son, as this is not a time for children). And then we laugh, and behind the laughter is [Herbert] Hoover’s horrible picture of thirty million people who must die unless there is some great intervention. But then again we think that things are never really as bad as that; and something will turn up, and the worst will never be. And somehow all these phases of feeling are true and right in some sense... (HB, page 373).

Under this unbearable pressure, Keynes exploded. Keynes exploded with a book called The Economic Consequences of the Peace. It condemned the political maneuvering of Versailles and the treaty that resulted in the strongest possible terms. He excoriated short-sighted politicians who were interested in victory rather than peace. He outlined his alternative proposals for peace: "German damages limited to £2000m; cancellation of inter-Ally debts; creation of a European free trade area… an international loan to stabilize the exchanges...."

And he prophesied doom--if the treaty were carried out and Germany kept poor for a generation:

If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for long that final civil war between the forces of reaction and the despairing convulsions of revolution, before which the horrors of the late German war will fade into nothing, and which will destroy... the civilization and progress of our generation... (HB, page 391).

The Economic Consequences of the Peace made Keynes famous. His horror at the terms of the peace treaty won him friends like Felix Frankfurter, a powerful molder of opinion in the United States. In his book, propelled by "passion and despair," Keynes "spoke like an angel with the knowledge of an expert" and showed an extraordinary mastery not just of economics but also of the words that were needed to make economics persuasive. Before The Economic Consequences of the Peace Keynes was primarily an academic (with some government experience) with a lot of influential literary friends. Afterwards he was a celebrity. He was not only the private Keynes: "the Cambridge don selling economics by the hour, the lover of clever, attractive, unworldly young men, the intimate of Bloomsbury." He was also--because of what he had done with his pen after Versailles--"the monetary reformer, the adviser of governments, the City magnate, the feared journalist whose pronouncements caused bankers and currencies to tremble... conferences jostled with holidays, intimacy merged into patronage. In 1925 the world-famous economist would marry a world-famous ballerina in a blaze of publicity..." (HB, page 400).

So after World War I Keynes used what power he had to--don't laugh--try to restore civilization. In Skidelsky's--powerful and I believe correct--interpretation, Keynes before 1914 "believed (against much evidence, to be sure) that a new age of reason had dawned. The brutality of the closure applied in 1914 helps explain Keynes’s reading of the interwar years, and the nature of his mature efforts... to restore the expectation of stability and progress in a world cut adrift from its nineteenth-century moorings..." (ES, page xv).

Skidelsky's narrative of the mature Keynes--Keynes in the 1920s--is far from being a one-note recounting of the brave but losing struggle against the approaching Great Depression, against political insanity, and against the Nazi Party's attempted revenge for the German defeat in World War I. Bloomsbury takes up a good chunk of the narrative. Skidelsky's book includes love letters from Keynes to his future wife Lydia Lopokova:

In my bath today I considered your virtues—how great they are. As usual I wondered how you could be so wise. You must have spent much time eating apples and talking to the serpent! But I also thought that you combined all ages—a very old woman, matron, a debutante, a girl, a child, an infant; so that you are universal. What defence can you make against such praises? (page 181).

But when he tries to paint a picture of what it was like to be a member of the Bloomsbury culture group in the 1920s, even Skidelsky cannot quite reach the full range. So he resorts to the imaginings of one of the characters of novelist Anthony Powell, who thinks that Bloomsbury must have been "...every house stuffed with Moderns from cellar to garret. High-pitched voices adumbrating absolute values, rational statse of mind, intellectual integrity, civilized personal relationships, significant form…. The Fitzroy Street Barbera is uncorked. 'Le Sacre du Printemps' turned on, a hand slides up a leg.... All are at one now, values and lovers" (page 11).

Virginia Woolf had a different, less happy and romantic view. She wrote of her "vivid sight of Maynard by lamplight--like a gorged seal, double chin, ledge of red lip, little eyes, sensual, brutal, unimaginate. One of those visions that come from a chance attitude, lost as soon as he turned his head. I suppose though it illustrates something I feel about him. He’s read neither of my books..." (page 15). There is a clear lesson: if your circle includes Nobel Prize-winnning caliber novelists with wicked pens, read their books and praise them as often as possible.

The bulk of this second volume--The Economist as Saviour--is, however, devoted to Keynes's political and intellectual struggle for stable money and full employment, and against deflation, overvalued exchange rates, and the sacrifice of the happiness of today's populations in the hopes of regaining the imagined benefits of the classical gold standard at some time in the distant future. Keynes spent more than a decade arguing against central bankers who "think it more important to raise the dollar exchange a few points than to encourage flagging trade." He tried to prevent Britain's return to the gold standard in 1925 at an overvalued exchange rate, for by overvaluing the exchange rate Britain's Treasury Minister, Winston Churchill, was willing

… the deliberate intensification of unemployment. The object of credit restriction, in such a case, is to withdraw from employers the financial means to employ labor at the existing level of prices and wages. This policy can only attain its end by intensifying unemployment without limit, until the workers are ready to accept the necessary reduction in money wages under the pressure of hard facts.... Deflation does not reduce wages 'automatically.' It reduces them by causing unemployment. The proper object of dear money is to check an incipient boom. Woe to those whose faith leads them to use it to aggravate a Depression! (page 203).

But in the end Keynes failed in the 1920s. He was unable to persuade British governments that economic policy should be decided upon by rational thought rather than by obedience to old poorly-understood verities. He failed to achieve any material easing of the terms of the Versailles treaty. He failed to prevent deflation and high unemployment in Britain. He failed to convince people that the Great Depression was a man-made catastrophe that could be cured relatively easily. His pen--though strong--was not strong enough. His allies were too few. And among central bankers and cabinet ministers, understanding of the situation in which they were embedded was rare.

So the 1930s saw a change of emphasis. Fewer short polemical articles were written. Instead, Keynes concentrated his attention on writing a book, a book which he thought

…will largely revolutionize--not, I suppose, at once but in the course of the next ten years--the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feelings and passions, I can’t predict what the upshot will be in its effects on actions and affairs. But there will be a great change... (pages 520-521).

And he was right.

His General Theory of Employment, Interest, and Money did change the world. It ends with a bold claim for the importance of ideas rather than interests that, in context, has to be read not as a considered judgment but as his desperate hope:

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.... But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil... (page 570). 

The extraordinary thing is that Keynes was right.

The other extraordinary thing is that Skidelsky has told the story so well.

Skidelsky is superb at getting at the heart of what the key contribution of Keynes's General Theory. As Skidelsky puts it, Keynes's key contribution was to find not a middle way but a genuine Third Way between "laissez-faire and central planning... conservatism and socialism." His proposals did not split the difference, but instead promised to achieve the benefit each of the traditional poles of politics had claimed but had never been able to deliver. Socialists promised full employment without economic freedom. (And Communists promised full employment without either economic or political freedom.) Conservatives promised economics (and sometimes political) freedom without full employment. Keynes, by contrast, promised both. His doctrines were thus politically irresistible: they would have been extraordinarily attractive to politicians and bureaucrats even if the doctrines and theories had not been true. Fortunately for all of us, they were true--or at least true enough to be very useful indeed in their historical context.

Skidelsky is also very good at focusing on the underlying liberal--classical liberal, that is--nature of Keynes's thought. Brought up in the laissez-faire classical liberal tradition, Keynes came to see it as a con: based on false claims about the world. But, Keynes believed, a good and smart government could make the claims of laissez-faire true enough.

Keynes saw the market economy as having two great flaws. The first was that demand for investment was extraordinarily and pointlessly volatile, as business leaders and investors attempted the hopeless task of trying to pierce the veil of time and ignorance. The second was that the fluctuations in the wage level that classical economic theory relied on to bring the economy back into balance after such an investment fluctuation either did not work at all or worked too slowly to be relevant for economic policy. (No, I am not going to be drawn into a debate about "unemployment disequilibrium.") But Keynes believed that if these problems could be fixed, then the standard market-oriented toolkit of economists would once again be worthwhile and relevant. And he showed a way to fix them or at least come close enough to fixing them, a way that we still use today--as you can see if you watch what Alan Greenspan's Federal Open Market Committee does next week.

So buy these books. Read these books. These are great books. Time spent with them is time well-spent. Robert Skidelsky deserves great honors for having devoted so much of his life to writing down the story of John Maynard Keynes, and writing it down so well.

Posted by DeLong at August 6, 2004 08:01 PM

From EH.Net: Christopher Tassava On Jim Lacey, "Keep from All Thoughtful Men: How U.S. Economists Won World War II"

Christopher Tassava:

Lacey (a retired U.S. Army officer and current writer on defense matters) describes the bureaucratic fights between civilian experts and military staff over the extent and speed to which the American economy -- hardly firing on all cylinders as war began in Europe -- could be reoriented to produce the munitions necessary for a serious military effort. At the center of Lacey's story are three economists who, he shows, had far-sighted views of the true capacity of the American economy: the reasonably well known Simon Kuznets and two nearly forgotten figures, Robert Nathan and Stacy May.

Lacey capably uses archival and secondary sources to show that these three men, along with a small group of other civilians inside the federal bureaucracy, were able to use social-scientific methods, including, crucially, statistical techniques, to assess how large the U.S economy could grow, how quickly that growth could occur, and how much war materiel the economy could produce for use by the U.S. and Allied militaries. Lacey persuasively shows that Kuznets, Nathan, and May were able to forecast in late 1942, before the first anniversary of Pearl Harbor, that June 1944 would be the moment at which the American “arsenal of democracy” would be able to produce sufficient materiel to launch a substantial invasion of Europe.

This date, of course, coincides with D-Day, which -- in Lacey's telling -- is due straightforwardly to the fact that the economists won their battle with their adversaries in the military. In what might now be termed “data-driven decision making,” Army Chief of Staff George C. Marshall (and his lieutenants) duly altered his plans for a cross-channel invasion to reflect the forecast realities of American industrial production….

Lacey's contribution to economic history consists of his ability to plumb these debates, at least up to late 1942, more deeply than previous scholars. Much of the material in this study is covered more accessibly in other scholarship, such as Paul A.C. Koistinen's specialist-oriented "Arsenal of World War II: The Political Economy of American Warfare, 1940-1945" (2004) or David Kennedy's popular "Freedom from Fear: The American People in Depression and War", 1929-1945 (2001)…. Lacey's narrow focus is a strength insofar as he uncovers new documentary evidence to support his arguments, and makes considerable effort to debunk several “myths” of the war, including General Albert Wedemeyer's claim to have developed the “Victory Plan” that matched American industrial production to Allied military needs…

Matthew Yglesias: Labor Unions and Public Opinion

Matthew Yglesias:

Labor Unions and Public Opinion: In the wake of the failed recall of Scott Walker, Doug Henwood of the Left Business Observer wrote a stirring from-the-left critique of American labor unions (more or less along the lines of Bob Fitch) that's prompted a number of interesting responses, relatively few of which grapple with what I think is Henwood's strongest point:

And as much as it hurts to admit this, labor unions just aren’t very popular. In Gallup’s annual poll on confidence in institutions, unions score close to the bottom of the list, barely above big business and HMOs but behind banks. More Americans—42%—would like to see unions have less influence, and just 25% would like to see them have more. Despite a massive financial crisis and a dismal job market, approval of unions is close to an all-time low in the 75 years Gallup has been asking the question. A major reason for this is that twice as many people (68%) think that unions help mostly their members as think they help the broader population (34%). Amazingly, in Wisconsin, while only about 30% of union members voted for Walker, nearly half of those living in union households but not themselves union members voted for him (Union voters ≠ union households). In other words, apparently union members aren’t even able to convince their spouses that the things are worth all that much.

Gordon Laffer's response to this in the Nation is typical… unions can't be unpopular because many non-union workers say they'd like to be in one….

This misses the force of Henwood's point. I wish billionaires had less influence over American politics. The fact that I would, personally, like to be a billionaire does not contradict that point. On the contrary, the untoward level of political influence enjoyed by billionaires is one of the main things that's appealing about my hypothetical billionaire lifestyle. If someone is inclined to view labor unions as primarily dedicated to advancing the interests of a privileged (remember that wage premium) minority of American workers, that's in no way inconsistent with a large share of the non-unionized minority wishing that they enjoyed those privileges.

If the upshot of those mixed feelings was a rapid rise in the rate of union membership, the contradiction would work itself out quickly. But since Taft-Hartley that hasn't been the case, and the union share of the private sector's been steadily declining...

Juxtapositions

Ultimate DeLong Smackdown Watch: William Timberman Inserts the Knife into My Gut, Twists, and Leaves Me Collapsed and Bleeding on the Floor

William Timberman:

Red Plenty: Crooked Timber: Lovely take. But it’s exactly that effect on you which distinguishes Spofford’s muse from those of other novelists/critics of the Soviet debacle. The academicians believed, at least for a time, that they could do it, and they probably felt very much like your misguided reader self felt as, slowly, they were disabused of those beliefs.

Couldn’t happen here, of course.

He is talking about technocrats who believed that they were part of a caste that understood the laws of motion of society and could educate politicians and policymakers to adopt measures that would bring us materially closer to utopia.

I was one such confident technocrat.

Once.

Only four short years ago.

Timberman is commenting on John Holbo's very creative reading of Francis Spufford's Red Plenty:

Red Plenty – My Brush With Brezhnevism — Crooked Timber: Apparently some readers have been confused about Red Plenty, thinking it is non-fiction. I had the opposite problem, or possibly it wasn’t one. I knew it was fiction but I had the wrong idea about what kind. This error persisted, uncorrected. I actively avoided all reviews or summaries. I solicited no assistance, along the way, from “the panther-footed Mr. Google,” as he is described in Spufford’s “Acknowledgement” section. As a result, I didn’t know what the hell was going on – at all – until the end. Because the one thing I thought I knew about the book – no, I don’t know where I mis-acquired this notion – was that it is a fictional alternative history of how Red Plenty, the fairytale dream, came true.

WARNING: Contains plotspoilers. (It turns out the Soviet Union lost the Cold War!)

I thought the premise of the book was: technical-political obstacles to an efficient Soviet-style planned economy somehow overcome. Some Platonically profound mathematico-industrial linear-programming la-dee-da alternative to the price mechanism is discovered that is, stipulatively, consistently superior, in practice. The first chapter, ‘The prodigy’, about Kantorovich’s bright plywood notion (read it yourself!), confirmed for me that this was indeed where we were going. Now you tell the story of how, just as Krushchev predicted, the USSR buries the West – in washing machines. How would the West have reacted if, in 1980, the income of the average Soviet worker passed that of his Western counterpart? How would the philosophical defense of capitalism and Western democracy have held up if the Soviets had managed to keep the growth rate up around 6-8%, year on year on year. I imagined, on the Soviet side, we might be treated to the fictional spectacle of some Steel-and-Concrete Glass Bead Game cybernetician Magister Ludi thrillingly shuffling all the productive pieces around, to the appreciative oohs and aahs of an audience of knowing fellow academicians.

Oh, to be an economist who can perfectly, rationally, plan a whole economy! Such sensitivity! The music of the spheres is a tin whistle to this! Ah, the delicious counterpoint that shall play out if this PNSh-180-14s continuous-action engine for viscose production is placed just so, its twin output streams of sweater yarn and tire cord marching and braiding, one over the other, joining this yet-more-harmonious overall stream, flowing on into a vast ocean of production and distribution!

The less lovely counterpoint to this would, naturally, be an inevitable degree of oppressive, Soviet-style unfreedom, or at least political/cultural alienation of the average workers from the planners, whose heads are in the Marxist clouds. But lots of washing machines! Would you prefer Western freedom and inequality to rule by genuine Soviet Philosopher Kings, if the philosophers could provide cheaper, better washing machines?

Again: why did I imagine the book was going to go this way? As I said, I don’t know where I picked up the idea, but it really fired my imagination. I was kind of jazzed to read about it.

So I was reading and reading and, like Mr. Khrushchev, started to feel a bit confused that things weren’t working out. Bad harvest in ‘63. But I figured the followers of Kantorovich were going to pull off some tremendous last-minute technical save. How not, if we were actually going to get to what the title promised? With Mr. K. sidelined, it was going to have to turn out the Brezhnev of this, fictional world, was a go-getting reformer, and the linear programming would deliver the goods, just like Mr. Scott always manages to get the engine running on Star Trek. (The basically sensible-seeming objections put forth in the woods by the pragmatist-cynic stick insect Mokhov would be stipulated to meet some fitting technical-political death.)

And then it was, like … over. And the communists lost. The final pages of the book, which I had been counting on to relate the glorious futurity of Red Plenty, stretching perhaps even to the stars, turned out to be devoted to notes and acknowledgements. Man was I one confused kid.

But I don’t mind having been an idiot. I feel I have lived the dream, to an even fuller degree than the author himself can reasonably have hoped. So I suggest you give a copy of the book to a suitably sheltered and suggestible friend, and lie about what it’s about. Let them enjoy the fairy tale, for as long as it lasts. I did. (But I never believed in Lysenkoism! Not even for a page!)

How the F--- Did "Marxists" Come to Decide That Fiscal Policy Was Ineffective?

Sheri Berman on the Weimar Republic and the SPD in 1931:

… At the labor movement's "crisis" congress in April, advocates of the WTB plan emphasized the increasing desperation of the masses and pointed out that both the Nazis and the Communists were trumpeting work-creation programs.... In the run-up to the elections that July, it became clear that... the SPD's program "contained no thoughts capable of stimulating the imagination.... One could not find in it ways out of the [problem of] mass unemployment."... [T]he elections were a disaster.... The SPD agreed to discuss the WTB plan yet again.... Hilferding declared that such proposals called into question:

the very foundations of our program... Marx's theory of labor value. Our program rests on the conviction that labor, and labor alone, creates value.... Depressions result from the anarchy of the capitalist system. Either they come to an end or they must lead to the collapse of this system. If [Woytinsky and others] think they can mitigate a depression by public works, they are merely showing that they are not Marxists.

Woytinsky responded to this charge with the following argument:

The flood of unemployment is rising, the people are at the end of their patience. The workers, holding us responsible for their misery, are deserting the party to join the Communists and the Nazis. We are losing ground. There is no time to waste. Something must be done before it is too late. Our plan has nothing to do with any particular value theory. Any party can execute it. And it will be executed. The only question is whether we take the initiative or leave it to our enemies.

...[A]ll but one of the SPD representatives of the meeting sided with Hilferding over Woytinsky...

Particularly since you have the guru:

Karl Marx: Economic Manuscripts: Theories of Surplus-Value, Chapter 17:

[T]he ancient mode of production… used a large part of the surplus-product for unproductive expenditure on art, religious works and public works… [not the] development of the material productive forces—division of labour, machinery, the application of the powers of nature and science to private production…. It is the unconditional development of the productive forces and therefore mass production on the basis of a mass of producers who are confined within the bounds of the necessary means of subsistence on the one hand and, on the other, the barrier set up by the capitalists’ profit, which [forms] the basis of modern over-production [and capitalistic economic crises]...

(Note: "unproductive" is here a technical term--not a value judgment.)

If applying expenditure to art, religious works, and public works could keep an ancient economy from crisis and depression, why couldn't the same keep a modern economy from crisis and depression?

It is a mystery...

Federal Reserve Confirmations

To my knowledge:

• Two people whom Obama intended to nominate or nominated to the Federal Reserve have been refused confirmation: Peter Diamond and Rich Clarida in 2010-2011.

• Two people whom George W. Bush intended to nominate or nominated to the Federal Reserve have been refused confirmation: Larry Klane and Randy Kroszner in 2008.

• Two people whom Bill Clinton intended to nominate or nominated to the Federal Reserve have been refused confirmation: Alicia Munnell and Felix Rohatyn in 2005-6 1995-6.

• Before then… to my knowledge, at least, you have to go back to 1914 and President Woodrow Wilson and the first batch of nominations to get any other examples: Thomas Jones, Richard Olney, and Harry Wheeler.

Am I wrong?

The Changing Recovery Dynamics of the US. Labor Market

In the really really old days--after the December 1970, the May 1975, and the December 1982 unemployment-rate peaks--a recovery would see the economy move to the northwest on the above graph, with the labor-force participation rate rising within a year and a half after the date of the unemployment-rate peak.

In the old days--after the June 1992 and June 2003 unemployment-rate peaks--the labor-force participation rate would not rise during recoveries, but it would not fall by much.

In the new days, however...

Daniel Davies: "as always the economists are the most romantic and least realistic of characters, persisting... with the dream that the underlying model is basically sound, and a few technical changes will make it possible…"

New Ideas From Dead Political Systems — Crooked Timber

Bruce Bartlett (2003) on How Fiscal Policy in the Absence of Monetary Offset Can Be Nearly Self-Financing Through Demand Channels Alone

Note: not the supply-side hysteresis channels η that we focused on in the conference draft of "Fiscal Policy in a Depressed Economy", but rather demand-side channels--μ and τ--alone:

Bartlett (2003) http://web2.uconn.edu/cunningham/econ309/lafferpdf.pdf:

In August 1976, [Jack] Kemp received data from the Congressional Research Service on the estimated revenue loss from the Kennedy tax cut. By comparing these revenue loss figures with actual revenue increases from the 1960s, Kemp concluded that the Kennedy tax cut increased federal revenue. Kemp's point was more of an assertion than hard evidence, since he had no data on what aggregate revenues were expected to be in the absence of the Kennedy tax cut. Interestingly, however, Walter Heller, chairman of the Council of Economic Advisers under Kennedy, soon made the case for him. In testimony before the Joint Economic Committee on February 7, 1977, he was asked by Senator Jacob Javits (R-NY) to comment on Kemp's analysis of the CRS memo. I was in the hearing room when Heller gave this response:

What happened to the tax cut in 1965 is difficult to pin down, but insofar as we are able to isolate it, it did seem to have a tremendously stimulative effect, a multiplied effect on the economy. It was the major factor that led to our running a $3 billion surplus by the middle of 1965, before escalation in Vietnam struck us. It was a $12 billion tax cut, which would be about $33 or $34 billion in today's terms. And within 1 year the revenues into the Federal Treasury were already above what they had been before the tax cut.... Did it pay for itself in increased revenues? I think the evidence is very strong that it did (Heller 1977: 161).

Heller was later embarrassed to have provided the supply-siders with the proof they lacked and tried to take it back (Heller 1980). But as a witness to the event, there is no reason to think he was not stating a sincere belief. Indeed, a review of statements by Kennedy, his advisers and supporters at the time clearly indicates their expectation that the tax cut would in fact raise federal revenue. Kennedy said in his Economic Club of New York speech on December 14, 1962:

It is a paradoxical truth that tax rates are too high today and revenues are too low, and the soundest way to raise the revenues in the long run is to cut the rates now (Kennedy 1963: 869).

During floor debate on September 24, 1963, Wilbur Mills, manager of the Kennedy tax cut in the House of Representatives, said:

There is no doubt in my mind that this tax reduction bill, in and of itself, can bring about an increase in the gross national product of approximately $50 billion in the next few years. If it does, these lower rates of taxation will bring in at least $12 billion in additional revenue (Mills 1963: 17907).

Contemporary analyses by the Council of Economic Advisers (1965: 65-66), Lawrence Klein (1969), and Arthur Okun (1968) suggest that Mills was definitely in the ballpark with his estimate.

Once the impact of the Kennedy tax cut became a political issue in the late 1970s, further analyses were undertaken. Data Resources, Inc. (DRI) and Wharton Econometric Forecasting Associates were contracted to study the impact of the Kennedy tax cut (House Budget Committee and Joint Economic Committee 1978). After reviewing these studies, the Congressional Budget Office drew the following conclusion:

The effect of the 1964 tax cut on the federal deficit has been a matter of controversy.... The direct effect of the tax cut was to reduce revenues by some $12 billion (annual rate) after the initial buildup. The increase in output and later in prices produced by the tax cut, according to the models, recaptured $3 to $9 billion of this revenue at the end of two years. The result was a net increase in the federal deficit of only about 25 to 75 percent of the full $12 billion (Congressional Budget Office 1978b: 25).

Thus, while the Kennedy tax cut may not have paid for itself immediately, there is overwhelming evidence that the federal government did not lose nearly as much revenue as it expected, owing to the expansionary effect of the tax cut on the economy.19 Consequently, Ronald Reagan was really not too far off when he asserted that the Kennedy tax cut paid for itself (Reagan 1982b: 871).

Monetary accommodation, at least as measured by the 10-year Treasury bond rate minus the then-current inflation rate, was substantial--with the proxy 10-year Treasury real rate falling from 3.0%/year to 1.5%/year in the wake of the 1964 tax cut:

Henry Farrell Calls the "What Did Hayek Mean and Was He Completely Wrong" Debate for the Late Tony Judt: Hayek Was Completely Wrong

Henry Farrell:

Hayek and the Welfare State: Bruce Caldwell’s defense is not that Hayek didn’t claim that the welfare state was the slippery slope to gulags and jackboots – it’s that he didn’t say this in The Road to Serfdom, although he did say it in his later works, and that one shouldn’t mix up the two arguments. Although Caldwell doesn’t mention it, Hayek himself conflates these arguments in his own introduction to the US edition of The Road to Serfdom…. Finally, Judt doesn’t actually attribute this argument of Hayek to The Road to Serfdom in any of its editions; he is talking, more generically, about Hayek’s “writings.” So I’m calling this one unequivocally in favor of Judt – contra Tyler Cowen, he wasn’t being unfair at all...

Austerity, American Style

Paul Krugman:

Austerity, American Style: Via Mark Thoma, Antonio Fatas has a good piece on the exceptional weakness of government spending in this recovery. I thought I might add to that observation. Let’s look at real government… purchases of goods and services — from all levels of government during three recoveries: the current expansion, the Bush Boom (such as it was), and Morning in America…. Which one is different? Now, this doesn’t include safety-net spending…. But actual government purchases have been uniquely weak, largely because of budget distress at the state and local level…

Most Read on Project Syndicate: Re-Capturing the Friedmans

Twitter / @ProSyn: Project Syndicate: ‏@ProSyn

Most read on our site: "Re-capturing the Friedmans" by J. Bradford @DeLong. http://t.co/61FABm7g.

Quote of the Day: May 7, 2012

"‘In our day,’ Nikita Khrushchev told a crowd in the Lenin Stadium of Moscow on 28 September 1959, ‘the dreams mankind cherished for ages, dreams expressed in fairytales which seemed sheer fantasy, are being translated into reality by man’s own hands.’ He meant, above all, the skazki‘s dreams of abundance."

--Francis Spufford, Red Plenty

Andrew Ure: The Philosophy of Manufactures

The Philosophy of Manufactures: Or, An Exposition of the Scientific, Moral ... : Andrew Ure:

Author: Andrew Ure
Publisher: C. Knight
Year: 1835
Possible copyright status: NOT_IN_COPYRIGHT
Language: English
Digitizing sponsor: Google
Book from the collections of: University of Michigan
Collection: americana
Notes: Reproduction of original from Kress Library of Business and Economics, Harvard University.

Will Future Economists and Historians Judge Obama/Bernanke/Boehner/McConnell More Harshly than They Judge Hoover?

They will certainly judge them much more harshly than they judge Roosevelt.

This Time, It Is Different: Cutting Edge Macro Finance from the 1870s for the 2010s

Rethinking Macroeconomics and Finance: Century Foundation April 13th, 2012 event:

Quote of the Day: April 30, 1942

"The history of enterprise in antiquity therefore falls naturally into two periods. First is the development of economic practices in Mesopotamia circa 3500-1200 BC. By the end of antiquity we find gain-seeking shifting away from productive enterprise to land acquisition, usury, profiteering from political office, and extraction of foreign tribute by force."

--David S. Landes, Joel Mokyr, William J. Baumol, eds., The Invention of Enterprise

Did the Forward March of Freedom Start or Accelerate in the 1980s?

Noah Smith does the honors:

Noahpinion: A standard intellectual-Republican narrative of history: John Cochrane has a new post up in which he discusses the historical importance of Milton Friedman's book Free to Choose…. The first half of the post is a discussion of the difference between negative and positive rights, with which I largely (but not completely) agree. But the second half consists of a reading of events since 1980 with which I take a number of exceptions….

Ask the Mineshaft: Is This too Hard a Problem for the Econ 1 Final?

Long-Run Growth: In 8300 BC there were roughly 5 million people in the world—with an average standard of living of about $500/year. In 1700 there were roughly 640 million people in the world—with an average standard of living of about $500/year. This problem explores how this came about.