Barro on Keynesian Economics vs. Regular Economics

Readers of this blog may have guessed by now that I am not a fan of The Wall Street Journal editorial page.  (Actually that is not entirely true.  The Journal editorial page is my go-to source of material whenever I am looking for something to write about on the blog.  So the truth is that I am deeply indebted and eternally grateful to the Journal.)  But I have to admit that even I was not quite prepared for Robert Barro’s  offering in today’s Journal.  You don’t have to be a Keynesian economist – and I have never counted myself as one – to find Barro’s piece, well, let’s just say, strange.

Barro is certainly more sophisticated than Stephen Moore who, having discovered, 75 years after Keynes wrote the General Theory, that Keynesian economics defies common sense, tried and failed to apply the coup de grace to Keynesian economics.  Employing a variation on Moore’s theme, Barro, with a good deal more sophistication than Moore, draws the contrast not between Keynesian economics and common sense but between Keynesian economics and regular economics.

Regular economics is the economics of scarcity and tradeoffs in which there is no such thing as a free lunch, in which to get something you have to give up something else.   Keynesian economics on the other hand is the economics of the multiplier in which government spending not only doesn’t come at the expense of private sector spending, amazingly it increases private sector spending.  Barro throws up his hands in astonishment:

If [the Keynesian multiplier were] valid, this result would be truly miraculous.  The recipients of food stamps get, say, $1 billion but they are not the only ones who benefit.  Another $1 billion appears that can make the rest of society better off.  Unlike the trade-off in regular economics, that extra $1 billion is the ultimate free lunch.

Quickly composing himself, Barro continues:

How can it be right?  Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people?  Keynes in his “General Theory” (1936), was not so good at explaining why this worked, and subsequent generations of Keynesian economists (including my own youthful efforts) have not been more successful.

Nice rhetorical touch, that bit of faux self-deprecation, referring to his own fruitless youthful efforts.  But the real message is:  “I’m older and wiser now, so trust me, the multiplier is a scam.”

But wait a second.  What does Barro mean by his query:  “Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people?”  Where is the market failure?  Hello.  Real GDP is at least 10% below its long-run growth trend, the unemployment rate has been hovering between 9 and 10% for over two years, and Professor Barro can’t identify any market failure?  Or does Professor Barro, like many real-business cycle theorists (say, Charles Plosser, for instance?), believe that fluctuations in output and employment are optimal adjustments to productivity shocks involving intertemporal substitution of leisure for labor during periods of relatively low productivity?

Perhaps that is what Barro thinks now, which would be interesting to know if it were the case, but about two and a half years ago, writing another op-ed piece for the Journal, Barro had a slightly different take on what is going on during a depression.

[A] simple Keynesian macroeconomic model implicitly assumes that the government is better than the private market at marshalling idle resources to produce useful stuff.  Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out.  In other words, there is something wrong with the price system.

John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels.  But this problem could be readily fixed by expansionary  monetary policy, enough of which will mean that wages and prices do not have to fall.

So in January 2009, Barro was at least willing to entertain the possibility that some kind of obstacle to necessary price and wage reductions might be responsible for the failure of markets to generate a spontaneous recovery from a recession, so that a sufficient monetary expansion could provide a cure for this problem by making wage-and-price reductions unnecessary.  But if that is what Barro believed (and perhaps still believes), it would be interesting to know if he thinks that monetary expansion, which, after all, can be accomplished at very little cost in terms of resources or foregone output is not somehow inconsistent with his conception of regular economics.  I mean you print up worthless peices of paper and, poof, all of a sudden all that output that private markets couldn’t produce gets produced, and all those workers that private markets couldn’t employ get employed.  In Professor Barro’s own words, How can that be right?

But let us assume that Professor Barro, obviously a very, very clever fellow, has an answer to that question, so that trying to increase output and employment by printing up and distributing worthless pieces of paper is not at odds with regular economics, while trying to do so by government spending – quintessential Keynesian economics – must therefore contradict regular economics.  Well, then, let’s ask ourselves how is it that monetary expansion works according to regular economics?  People get additional pieces of paper;  they have already been holding pieces of paper, and don’t want to hold any more paper.  Instead they start spending to get rid of the the extra pieces of paper, but what one person spends another person receives, so in the aggregate they cannot reduce their holdings of paper as intended until the total amount of spending has increased sufficiently to raise prices or incomes to the point where everyone is content to hold the amount of paper in existence.  So the mechanism by which monetary expansion works is by creating an excess supply of money over the demand.

Well, let’s now think about how government spending works.  What happens when the government spends money in a depression?  It borrows money from people who are holding a lot money but are willing to part with it for a bond promising a very low interest rate.  When the interest rate is that low, people with a lot cash are essentially indifferent between holding cash and holding government bonds.  The government turns around and spends the money buying stuff from or just giving it to people.  As opposed to the people from whom the government borrowed the money, a lot of the people who now receive the money will not want to just hold the money.  So the government borrowing and spending can be thought of as a way to take cash from people who were willing to hold all the money that they held (or more) giving the money to people already holding as much money as they want and would spend any additional money that they received.  In other words, i.e., in terms of the demand to hold money versus the supply of money, the government is cleverly shifting money away from people who are indifferent between holding money and bonds and giving the money to people who are already holding as much money as they want to.  So without actually printing additional money, the government is creating an excess supply of money, thereby increasing spending, a process that continues until income and spending rise to a level at which the public is once again willing to hold the amount of money in existence.

Now I am not saying that the two approaches, monetary expansion via printing money and government spending by borrowing, are exactly equivalent. But I am saying that they are close enough so that if restoring full employment by printing money does not contradict regular economics, I have trouble seeing why restoring full employment by borrowing and government spending does contradict regular economics.  But I am sure that Professor Barro, very, very clever fellow that he is, will clear all this up for us in due course, perhaps in a future op-ed in my go-to paper.


72 Responses to “Barro on Keynesian Economics vs. Regular Economics”

  1. 1 Lee Kelly August 24, 2011 at 3:36 pm

    In other words, fiscal stimuli work by increasing the supply of close substitutes for money. People who are holding money shift into government bonds instead, reducing the demand for money and, ipso facto, stimulating spending. Assuming there is an excess demand for money and idle resources to begin with, there will be little or no crowding out when additional government expenditures are financed with debt.

    Fiscal stimuli are a rather round-a-bout way of achieving monetary equilibrium, and they should be superfluous when there are central banks and fiat money — notwithstanding the so-called liquidity trap.


  2. 2 João Marcus Marinho Nunes August 24, 2011 at 6:00 pm

    David Where did the “Inflation and PLT targeting” go?
    Seems to me the crucil assumption is:
    “…giving the money to people already holding as much money as they want and would spend any additional money that they received…”.
    But aren´t these unemployed, underemployed, etc, “liquidity constrained” so that they might not spend of the new money?


  3. 3 David Glasner August 24, 2011 at 7:29 pm

    Lee, I think you have more or less summarized my view pretty well. Sorry for all those qualifiers, but I am not entirely sure what my view is. And I am not trying to clever.

    Marcus, Sorry, but I am not getting your point. Please rephrase your question and I will try to answer.


  4. 4 Lee Kelly August 24, 2011 at 8:36 pm

    The argument against Keynesians has to proceed by reducing the case for fiscal stimuli to a theoretical curiosity which has no place in practical macroeconomic policy.

    As you correctly point out, fiscal stimuli can increase aggregate nominal expenditures by reducing the demand for money, but a lot of conditions must be satisfied and the net benefits are unclear in the long-run.

    Key to the criticisms of Keynesianism concern the paradox of thrift and liquidity traps. In the end, if liquidity traps are a real problem for monetary policy, even for central banks with fiat currencies, then the case for fiscal stimuli is much stronger.

    I don’t think there is such a thing as a liquidity trap or, at least, that is such an impediment to central banks. In my opinion, this is the weak spot of Keynesianism, but too often I find myself defending the idea of fiscal stimuli from bad arguments by people I ought to be agreeing with!


  5. 5 Bob Zonis August 25, 2011 at 6:36 am

    Joao, you have got to be kidding me. Have you ever been unemployed, much less long-term? Savings are actually less than zero, because there is less cash income than is needed for what is considered necessary for maintaining life and health. Any increase in cash inflow will only staunch the bleeding from savings.

    Which leads me to ask, David – (economics courses were thirty some-odd years ago) does classical economics not take into account the “ability” to save? It’s not that I don’t “want” to hold more of those little pieces of paper, it’s that I consider feeding my family and keeping a roof over our heads to be a greater good. I am simply not “able” to save anything.

    Personally, I think anyone who claims not to understand the Keynesianistic case for stimulus is being either disingenuous and/or deliberately evil. It’s not that hard to understand. There are people who are capable of working, but are not able to find a job that pays enough to support their family. There is infrastructure who’s deteriorating condition is a drag on the present (or future) economy. There is a large pool of money that can be borrowed for thirty-year terms at low-to-negative rates of interest. How can borrowing money to put unemployed people back to work on projects that will add value to the economy fail to be a good thing?

    The Wall Street Journal editorial policy seems to be: “Anything that might help the economy would help Obama get re-elected (the ultimate disaster) and must therefore be opposed.”


  6. 6 João Marcus Marinho Nunes August 25, 2011 at 7:36 am

    The first sentence referred to the fact that I thought your IT-PLT post had dissapeared.
    The rest is on Barro.


  7. 7 David Glasner August 25, 2011 at 8:01 am

    I accidentally trashed it when I accidentally posted the Barro piece before it was ready. But as you can tell the IT-PLT piece is now back up. I will get back to your comment later. Accidents happen.


  8. 8 Benjamin Cole August 25, 2011 at 11:29 am

    David–Excellent blog

    Side note to Lars: Your presentation was excellent, and I am sorry if it was not well-received.

    I suggest the NGDP crowd take a page from the GOP notebook: Stay on point, find effective slogans or easy-to-digest explanations, and keep repeating your themes.

    I sense that NGDP is entering the national dialogue. Keep posting everywhere you can, commenting, writing letters to the editors etc.


  9. 9 Morgan Warstler (@morganwarstler) August 25, 2011 at 12:33 pm

    Ya know just saying things doesn’t make them true….

    ” Real GDP is at least 10% below its long-run growth trend”

    Using my own eagle eye, I drew this green line…. it looks to me like we’re right on track, after a bunch of fake growth in the aughts, and they corrected.

    See it here:

    The question is why we didn’t eat a little bit of policy to unstick wages at every point from 1999 on.

    REMEMBER, whether is is Fisher or Sumner, the hard part is having the nuts to piss on booms.

    AND WHAT THAT MEANS is that when we run 3 or 4% NGDP level for a couple quarters, we’re raising rates EVEN IF unemployment is still 8.5%.

    Eventually we are going to blame the public employees and treat them like they were treated in 1999.

    Funny that, right when we start really overpaying public employees is when the dollar falls as we get up OVER TREND.


  10. 10 David Glasner August 25, 2011 at 3:04 pm

    Marcus, Thanks for the clarification. I don’t follow your point. Liquidity constraint means that their spending is limited by the lack of liquidity, so that if you give them cash, they will spend it.

    Lee, I wouldn’t necessarily exclude all fiscal stimulus in a recession. First, there are the automatic stabilizers (to use Friedman’s term) that automatically increase the deficit as the economy slows down or goes into a recession. It is self-defeating to try to cut that deficit by cutting spending or increasing taxes. Second, it makes perfectly good sense to time public works spending to coincide with cyclical downturns. The government saves money by hiring workers who would otherwise be unemployed, and the added spending provides some cushion to other businesses which don’t see as drastic a cut in demand as they would have without the public-works spending. But I view that fiscal response as secondary to monetary policy, not as primary.

    Bob, As indicated in my reply to Marcus (aka Joao), I agree with you that the unemployed are likely to spend any cash that comes into their hands.

    Concerning your question about the ability to save, economists (at least UCLA economists) are very wary of terms like “able” and “need” in connection with economic decisions. People living a century ago had incomes only a fraction of our incomes, but they managed to save nonetheless. People in China save enormous amounts of their income (though in part because their government makes it difficult for them to spend). As I already mentioned, I generally agree that there is a case for some fiscal stimulus but I don’t know myself how to quantify its magnitude. The tone of my comments about Barro was to some extent the result of my feeling that he was making economic arguments based on a political bias rather than a disinterested analysis, but as a general principle, I am against attributing evil motives to people who disagree with me.

    Benjamin, Thanks.

    Morgan, I missed you. Where have you been? You are a fun guy, but I would really appreciate it if you would watch your language when you visit. My daughters like to read the blog from time to time, and they are very prim and proper. You would be surprised to know how culturally conservative I really am.


  11. 11 jomiku August 25, 2011 at 3:14 pm

    Isn’t another part of it that Barro comments about multiplier effects as though supporting aggregate demand requires government money must have a tremendous multiplier? Isn’t part of demand support in a bad time simply propping up demand? Some spending has a high multiplier, while some spending is more a shifting of money out of some source of savings into consumption. Even calling all the money “spending” is a misnomer of sorts because a tax break then is spending and non-Keynesian economists on the whole love tax breaks. Substitution of state funds with federal funds isn’t high multiplier “spending” as the term is often used because it shifts existing spending to a borrower who can sell longer-term debt at very low rates from a borrower who is constrained. And many of the people who rail about “spending” then say we should be borrowing to build infrastructure, when of course that is actually spending of the kind with a notable multiplier.

    Even the idea of a multiplier is odd. If you spend a dollar now and you finance it for pennies on the dollar, then you’ve moved money from the future into the present. How should the multiplier be calculated? If we equate future money with present money, then there is no way economies work, no reason for businesses ever to borrow because future money is exactly the same as present money. Everyone knows we don’t value the future as much as the present. That’s why we have interest. And don’t people in the next breath complain that inflation erodes the value of future debt?


  12. 12 Simon August 25, 2011 at 3:22 pm

    I still, as an amateur who had tried studying macro on my own, don’t understand the multiplier. I guess what I’m having trouble understanding is the temporal dimension of the concept. The “Y” that is increased upon spending x, is supposed to grow by more than x because of the MPC, but what is it exactly that is growing? Is it nominal or real GDP? Over what period?


  13. 13 Morgan Warstler (@morganwarstler) August 25, 2011 at 3:40 pm

    Simon, don’t get caught up in the multiplier, there isn’t one.

    You only need to know this: ANYONE who really earns their money running businesses in the private market KNOWS the only reason David thinks what he thinks is because he wants to have some power too.

    David, sorry about your kids liking to read your blog! But I will be more careful, seriously.

    Perhaps they’d like to see you really answer questions!

    REMEMBER, whether is is Fisher or Sumner, the hard part is both raising rates in “party just started” good times AND convincing everyone you will do it.

    Neither Fisher, nor Sumner thinking supports printing during slowdowns IF we won’t/can’t/don’t tighten up LONG BEFORE the unemployment will actually feel good.

    The problems we have are structural, and what you will never see is DeKrugman support throwing out the very laws that create the sticky wages he’ll say prove we need to print.

    The fact that you eggheads don’t recognize it invalidates the full weight of his opinion shows your bias.


  14. 14 Mitch August 25, 2011 at 3:47 pm

    Given that you’ve given quite a clear and persuasive explanation for Keynesian economics, why is it that you don’t count yourself as a Keynesian?


  15. 15 jpd August 25, 2011 at 3:55 pm



  16. 16 Steve August 25, 2011 at 7:19 pm

    So in summary, if you disagree with Morgan, you’re a biased egghead. If you are not sure you disagree with Morgan you are a moron with potential – bias.

    I get Morgan’s point that the Fed should take away the punch bowl before people are drunk and loose with their credit. However, where is the calibration to degree of “imperfection in structure” to rate of employment? Why do you chose the slope of your line and the end points and why are those “correct” as in the true real economic long-run full-employment output over years of low tax burdens, free-trade, free-wars, free yuan, and all else.

    We must have a structural problem. How else would you account for the vast wealth of the country shifting into fewer and fewer hands. Free loaders just want to stay poor and collect food stamps for the sheer image it provides them and the opportunities if affords their children – right. It’s starting to make sense now. If you say it enough times it seems to become true.

    I do know what he means though; unemployment in short bursts right after a major expansion would be easier to absorb, but that’s not what we are dealing with here. I’m sure we can agree to give up sticky wages if you agree to not change the number of H1B visas just because the salaries of some sliver of workers rises, or if you can ensure that you won’t defund regulators trying to police the real Ponzi’s of the world. Hmmmm, I didn’t think so.


  17. 17 David Glasner August 25, 2011 at 7:28 pm

    Jomiku, You are certainly right that it is extremely hard to estimate in any quantitatively precise way what the multiplier is. Barro’s best point was that it was ridiculous for the Secretary of Agriculture to pretend that he knew that the multiplier on spending on food stamps is 1.84. One could believe that there is a coherent theoretical basis for a positive multiplier effect and still be dubious that the actual effect could be estimated precisely or that it was as high as 1.84.

    Simon, You are actually asking a very sophisticated question about which there is a considerable literature dating back to the early days of what was once called the Keynesian Revolution about how to interpret the multiplier. The answer is it can be viewed either as a timeless concept, the ratio between certain categories of autonomous spending and total income or as the limit of a geometric series of progressively declining increments to spending over time.

    Morgan, I try to be very accommodating of my children’s desires, but every parent knows that you have to draw the line somewhere. Just wondering, are you referring to Irving Fisher? If so, why are you linking him in particular with Sumner? I actually did a post on sticky prices, maybe you should have a look. On the other hand, something tells me that you won’t buy it. Oh well.

    Mitch. That’s an interesting question. What I try to do in economics is try to understand how different models relate to each other. All models have to have a certain logic if they are coherent, so if different models seem to lead to different conclusions, that has to be accounted for by some differences in the underlying assumptions of the models. There are a lot features of the Keynesian model that I don’t like and in general I prefer to work in terms of money demand and money supply and the price level, which are not handled particularly well in the Keynesian model. If you really want to understand how I think macroeconomics and monetary should be done, you could have a look at my book Free Banking and Monetary Reform.


  18. 18 Simon August 25, 2011 at 7:39 pm

    Thanks so much for the response David. I kind of feel proud for asking “a sophisticated question!” Look forward to reading more.


  19. 19 Simon August 25, 2011 at 7:56 pm

    One more question (I know its hard to answer here). A lot of criticism of Keynesian economics that I’ve read such as the (simplistic) Economics in One Lesson by Henry Hazlitt and comments by John Cochrane note that money saved “doesn’t just sit there” and instead is transformed into investment, which is itself a form of consumption. My impression is that this doesn’t necessarily hold at all times, and especially during a depression, due to intricacies of financial intermediaries (which I do now know much about). Is this a correct intuition?


  20. 20 Philo August 25, 2011 at 7:56 pm

    You say: “When the interest rate is that low, people with a lot [of] cash are essentially indifferent between holding cash and holding government bonds.” ‘Essentially indifferent’ is a slight overstatement, but presumably the (Keynesian) idea is that in a depression there is a lot of cash being held by people who only slightly prefer holding cash to holding government bonds. Thus the government can acquire a lot of cash by offering these people slightly more attractive prices on government bonds–by slightly raising the interest rate it offers to pay bondholders. It can then spend this cash, or give it to people who will spend it. This is an effective way of increasing (not the money supply, but) the velocity of circulation, though it has the drawback of increasing the government’s indebtedness.

    This drawback would be avoided by the pure monetary policy of simply increasing the money supply–for example, simply printing up more currency and either spending it or giving it away. Nor is it necessary to target the give-away to would-be spenders (though doing so would be more efficient, ceteris paribus): even would-be hoarders have a satiation point, beyond which they will try to avoid holding any more cash. If you print *enough*, they will spend, whoever “they” are!

    (Rather than saying that by Keynesian borrowing-and-spending “the government is creating an excess supply of money,” it might be better to say “the government is bringing it about that the [unchanged] supply of money is excessive.”)

    You go on (in the comments): “I generally agree that there is a case for some fiscal stimulus but I don’t know myself how to quantify its magnitude.” Why not rely exclusively on monetary stimulus? It would do no harm for the government to start practicing fiscal austerity even as a recession was threatening: any contractionary effect could be offset by a sufficiently expansive monetary policy.


  21. 21 Morgan Warstler August 25, 2011 at 9:01 pm

    Steve, I chose my line because it looks more historically accurate.

    David please LOOK A IT (yelling), and explain whats wrong with it. Please.

    Steve, I favor fiscal and tax policy that creates more capitalists (see distributism), because right now our regulatory and tax system PENALIZES SMBs (those who invest in themselves) and favors traders / corporatists.

    After that is reversed things will be fine. For the next ten years, I want SMB owners to pay much less and the Fortune 1000 crowd to pay much more.

    If you don’t think that’s easy to do, ask me how.

    Over the past ten years what is remarkable is that the 90-99% class didn’t LOSE anything. The bottom 90% lost to the top 1%.

    in real life thats what happens when Big Government partners with Big Business.

    You can’t take down those who spend part of their earning life in the 90-99% – they are 30-40 million, they all vote every time, and they own property – including all the guns. I suspect you are unfamiliar with the real demo stats on millionaires.

    I mention that the top 1% can’t beat the 90-99%, because the strategy of the masses at the bottom like any C power should be switch allegiances between the two major players, and if they grasp and accept where the real power lies, they’d get better outcomes for those at the bottom.

    The unanswerable fact is that we are going to be a service economy – and that means we want as many people who are able to be able to eat out and be entertained as possible.

    Cut the Tea Party’s taxes, take it out on the oligarchs, and those at the bottom will start to recover.


  22. 22 jmrm August 25, 2011 at 9:48 pm

    Morgan Warstler wrote:
    >Steve, I chose my line because it looks more historically accurate.
    >David please LOOK A IT (yelling), and explain whats wrong with it. Please.

    Well, for one thing, you don’t understand that growth is always an exponential, never linear. Redo your y-axis as logarithmic, and you’ll see why experts believe we are horribly depressed from where we should be.


  23. 23 Greg Ransom August 25, 2011 at 10:25 pm

    Lee writes,

    “Key to the criticisms of Keynesianism concern the paradox of thrift and liquidity traps.”

    Actually, no. The key to countering Keynes is showing what real productive & consumption & leverage structures are out of line which set up the conditions for system wide monetary disequilibrium — once you’ve shown that, you’ve shown that Keynesian “stimulus” efforts can’t hope to correctly target the essential elements of the structural disequilibrium which must re-mesh coherently to get the system back into equilibrium.

    The “stimulation” of additional demand in the wrong sectors & the re-leveraging of the system by pumping up credit & money & leverage in the wrong places can work to produce additional value-destroying dis-coordination, rather than alleviating it via value-producing coordination.

    The HUGE fallacy in all of monetary economics, Keynesian or otherwise, is the failure to look at value creation and value evaporation.

    People have bulldozed uncompleted houses & housing stock because dis-coordination reveals things to have less value than the cost of maintaining them. I.e. we don’t have “idle resources” — the revealed dis-coordination exposes what have turned out to be now non-economic _no-longer-resources_.

    Using a massive blow-pump to pump dollars and resources into 5th wheel things which can never again have what turned out to be their illusory valuational place in the system is equivalent to the alchemists attempt to turn lead into gold.


  24. 24 teageegeepea August 26, 2011 at 12:47 am

    Morgan, did you just draw a line that looks right to you? Economists would normally let a line of best fit be generated by the data in the sample.

    Barro’s wording seems to leave him wiggle room to say that he wasn’t actually accepting Keynes’ diagnosis of the problem except for the sake of argument. But that would be rather weasely.

    Williamson responds that we can’t conclude market failure in absence of a model (I think he’s echoing Demsetz on the “nirvana fallacy”), and he won’t accept models based on sticky prices unless they explain to his satisfaction why it is that we see “contracts set in nominal terms [..] prices changed infrequently for some goods and services […] a firm unwilling to change its price but more than willing to incur the costs of changing output and employment”. Or as Kevin Hoover paraphrased more than two decades ago “It is only if these rigidities (e.g., long term labor contracts) can be deduced from first principles-say, from a general equilibrium system with contingent contracts-that the models can be accepted, even if they fit the data. For only then can their predictive success rest on more than the accidental constancy of a theoretically variable bit of reality”.


  25. 25 stearm August 26, 2011 at 1:20 am

    Barro, who’s this guy?

    If I want to read a motivated criticism of government intervention I read Schumpeter. And even Schumpeter admitted that government could intervene during a recession.

    Barro’s contribution to economics is zero compared with Schumpeter.

    Stop reading supposedly experts who know nothing.


  26. 26 Ed August 26, 2011 at 2:56 am

    “economists (at least UCLA economists) are very wary of terms like “able” and “need” in connection with economic decisions. People living a century ago had incomes only a fraction of our incomes, but they managed to save nonetheless.”

    Tant pis UCLA economists. The idea that you could erect a meaningful social science discipline based on analytically eliminating the human categories of “able” and “need” is risible. It is of a piece with the tendency of some economists to commit the mistake of what philosophers call misplaced concreteness by assuming that homo economicus somehow describes something which is full-bloodedly real rather than a construct which is useful for analytic purposes, but hardly in all contexts, and not even in all supposedly economic contexts — as the necessity for the dei ex machina of “expectations,” rational or otherwise, and “confidence” show.

    Thus, we can ask exactly which “people” from a century before does Glaser have in mind? The ones who by a combination of luck and brains — almost always more the former than the latter — managed to survive? Or the large numbers of people who were not as “able” as others to accumulate sufficient savings to meet their “needs” and thus get them through the famine or other cataclysm.

    Oh yes, the human race has managed to survive and, in material terms, arguably even prosper up to this point. But to to suggest that economists, because they work “in the aggregate,” can airbrush out the categories of insufficient abilities and unmet needs because the aggregate level of savings was enough to get “us” through simply puts economics in the position of being more dismal than it is intellectually responsible — or necessary — to be.


  27. 27 eclectic observer August 26, 2011 at 6:30 am

    You don’t have to be exotic to understand the multiplier effect. All you have to do is view economic history as markets and trade expanded from the decline of Rome in Europe and as the Middle Ages progressed. Prosperity could have never come to countries and regions the way it did without a merchant class creating a muliplier effect where none had existed. Certainly there are limits to the effect and also certainly full employment for a given state of technology is still a constraining concept worth awareness. Other than that it seems to me that some don’t like the multiplier effect because of ideology.


  28. 28 Barry August 26, 2011 at 6:32 am

    “So in January 2009, Barro was at least willing to entertain the possibility that some kind of obstacle to necessary price and wage reductions might be responsible for the failure of markets to generate a spontaneous recovery from a recession, so that a sufficient monetary expansion could provide a cure for this problem by making wage-and-price reductions unnecessary. ”

    What’s interesting is that four major things have changed (or been revealed) since then:

    1) There is no doubt in any honest, informed person’s mind that we are in both deep and persistent trouble.
    2) Keynesian economics has kicked RBC/Chicago’s b*tt in terms of testable predictions.
    3) The right has not only not been held to account, but has been able to get away with this, and profit from it.
    4) The elites have found that trashing the world’s economy is not only not the end of the world (for them), but rather profitable.

    Or, in short, the Big Lie is workable, and now Barro is back to sticking with it.


  29. 29 rjw August 26, 2011 at 7:11 am

    It is strange how a very smart person (like Barro) can take an axiomatic starting point (markets always clear) to it’s logical conclusion, and as a result end up seeming like the stupidest person on the planet. Is it just economics that has this effect on people ?


  30. 30 Morgan Warstler (@morganwarstler) August 26, 2011 at 8:16 am

    jmrm, yeah exponential inflation growth is unacceptable.


    yep, just right to me, see I see most of 2004-2008 as aberrant, as in too hot – as in what happens when people are living far beyond their means

    Ya know EVEN SUMNER admits that we aren’t going to be using the curve points which assume we’re missing 11 points of NGDP.

    SO I’m going to say it again… my line looks about right.

    David? Oh David? (crickets)


  31. 31 John Hawkins August 26, 2011 at 8:20 am

    Ed, I think what David means by economists “not liking the word need” is that they prefer to use the word “want”. Many immigrants of a century ago (that “unlucky” sect of people you seem to think died off from a lack of assets) lived in slummier conditions than perhaps their income “prescribed”, conditions that offended locals and “natives”, because they decided they wanted to save rather than optimize the present. David’s point was that we don’t know the desires of other people, how they are able to meet them, and what specific impediments have recently come to block their way. Economists don’t speak of “need” because of the very “concreteness” your philosophers decry. The only thing an economist can speak of with a nominal exactitude is of peoples wants and desires as exhibited by their actions, not this amorphous concept of “necessity”.

    Think of Hamlet. he reduces absolutely everything down to choice and desire, even life itself: “To be or not to be.” Life itself is not a necessity, but a want, so how can anything within life be a necessity? “The human race has survived” because it intends to do so, not because it “needs” to. Perhaps the grimness of your outlook is due to the fact that as far as economics is concerned with the subjects of choice and scarcity (a scarcity of resources and, most importantly, time; a scarcity which is the very reason we need to make choices, without which the only thing that would matter would be the order in which we do things and not whether we ever do them at all), it is truly an existential science.


  32. 32 Lewis August 26, 2011 at 8:40 am

    The problem (well, one more problem) with the Barroes of the world is that, even as they rail against any sort of fiscal stimulus, and even as many of them go so far as to rail against monetary stimulus, their solutions are nonsensical.

    Take, for example, a comprehensive bout of deficit-neutral tax reform; the rollback or reworking of deductions, an across the board adjustment of rates, and no net increase in revenue. In abstract, this isn’t actually such a terrible idea. The tax system as structured right now is woefully inept at incentivizing the kind of conduct that will roll back this decession or repression or recoverycession or whatever we’re calling it this week.

    What are our problems? An idle labor force, unused capacity and dormant cash. An overhauled tax scheme that incentivized people to all get off their duffs and do something with their assets could easily help alleviate a lot of the pressure while being at or near deficit neutrality. Notice that this isn’t really Kenseyan. Government is not borrowing against the future to pay for the present; it’s merely shuffling around what’s already there.

    But conservatives – the WSJ editorial board included – would never stand for such a tax reform package. Why? Because, at bottom, their arguments aren’t actually about economics. Conservative pundits these days are about “freedom” – whatever the heck that means. Smithian talk about invisible hands and optimal allocation by free market actors only covers up the truth about what these folks are /really/ saying: “I earned my money, and you can’t have any because it’s mine.”

    Contemporary conservative theory is all normative, not economic. It’s difficult to argue incentives with folks like this because, if you scratch the surface terribly hard, you find that the real reason most conservatives won’t go along with, for example, a dividend tax hike offset with a payroll tax cut (what’s happening literally right this minute in Washington), is that they just don’t think it’s fair, or constitutional, or whatever. Your narrative about the effect of government borrowing is apt, because it demonstrates the actual nugget at the core of this disagreement. That view of what deficit spending means is anathema to a conservative, who simply /cannot/ allow for the possibility that government can better allocate a person’s money than that person can.

    Never mind that the rational thing for the private individual to do in the face of deflationary pressure is to hoard, and thereby hurt the economy further. Never mind that a countervailing, government-induced inflationary force might alleviate some of that pressure. “Government wants to reallocate my resources? But I want to hoard them! I am a private party! I must be right all the time always! You must not interfere! La la la la I can’t hear you!” And voila: the Tea Party.


  33. 33 Morgan Warstler (@morganwarstler) August 26, 2011 at 9:39 am


    And that’s too bad for you huh? And all those little people you are trying to help!

    Please understand the offense is yours. Those who have should be ASKED what they want before they give. And if their ASK is doable, they should get it.

    Example: my approach to ending unemployment – Guaranteed Income.

    Note: my plan has the full support of Scott Sumner. The deal that will be made to fix all this is about LETTING THE TEA PARTY HAVE what it wants on Fiscal and letting you eggheads have what you want on Monetary.

    Lewis, I’m 100% sure you said all of the above as if there isn’t a simply policy fix that would satisfy the Tea Party – as if they got their way on DC tax and spending policy, they would change their attitude on monetary.

    But everyone here knows that is wrong.

    And that means you really don’t care about monetary, you care about fiscal, and since you don’t want fiscal to change, you want to talk about monetary.


  34. 34 Morgan Warstler (@morganwarstler) August 26, 2011 at 9:40 am

    as if they got their way on DC tax and spending policy, they wouldN’T change their attitude on monetary.


  35. 35 mike August 26, 2011 at 10:43 am


    It’s fantastic that you’ve worked with some data yourself to generate a trend line. The problem is, you haven’t done it right, and so you’re getting a (quite significantly) wrong result. You can either accept that you’re mistaken, learn why and how to fix it, correct it, and then see whether you still have an argument, or you can continue to argue from ignorance.

    jmrm’s earlier comment about exponential vs. linear growth is exactly why you are wrong. This video I found might help with some intuition about the exponential function by using a bunch of examples to demonstrate its features:

    I don’t mean to be unkind, but to talk about this stuff without being way off, I can’t emphasize enough how important it is to understand the concept of growth rates and the notions of exponentials and logarithms.


  36. 36 Lewis August 26, 2011 at 11:53 am

    … pretty sure you missed my point. My point was, in effect, that Barro (and perhaps yourself) aren’t really comparing Keynes to “regular economics” and finding Keynes wanting. Barro isn’t really doing economics at all. He’s doing ethics, or constitutional law, or something. He’s just couching it in economic terms so folks who read a paper with “Wall Street” in the title can pretent they’re actually talking about smart ways of handling money.

    I’m happy to go back and forth with you all day long about the normative merits of income redistribution as opposed to laissez-faireism. Well, not really; I do have a job. But I’ll say this much: “this violates an ethical tenet of my belief system that government is a bad handler of money” is not an economic argument.

    It’s back to Barro’s bizarre claim that there’s no market flaw at work. Individual actors are definitionally unable to correct structural flaws in the market on their own. One can’t expect a lone investor to irationally buck all of the incentives directing him to hoard capital in the hope that his straining against the tide of deflationary expectations will somehow uncork all of that idling capital. An external force – something that exists alongside the market rather than in it – is the only thing that can be rationally expected to have any effect. Postmodern? Perhaps. But it makes plain what conservatives don’t understand: a market handicapped by its own faults cannot fix itself.

    Interestingly, your “solution” to unemployment acknowledges this by imagining that government will somehow /force/ people to work. As somebody who has written a fair amount on the topic of Constitutional law, I’ll leave aside for the moment that what you propose is sort of self-evidently a violation of due process and the Thirteenth Amendment. But that aside, what, if I may ask, is the substantial difference between your solution and a set of fiscal incentives to make hiring more appealing?

    There seem to me to be two. The first is that your solution focuses on changing the behavior of the labor sellers rather than the labor buyers, which I suppose is fine in the abstract. The second is that yours is fully totalitarian and deeply reminiscent of Bolshevik-style communist/statist command of laborers, whereas mine merely represents the shuffling around of the tax code to tweak incentives. I’m confiscating money, whereas you’re confiscating people.

    Clever fellow, you’ve flipped the script on me! You’ve forced me to object to your solution – government forcing people to do labor against their will and federal regulation of what constitutes “slacking off at work” – on the grounds that it violates my ethics and is utterly despicable, even though it would likely solve the problem from an amoral economic standpoint! Kudos!

    It is true, the reinstitution of slavery in exchange for government-enforced poverty of something on the order of a fifth of the American population may well end this recession for everybody who isn’t lazy enough to need your “unemployment insurance”, but I will continue to object to it on the grounds that my freedom to choose my own employment is mine, and that you can’t have it. Yes, I reject your proposal that enough money to feed your children should be contingent on your indentured servitude to a pooper-scooper service. Woe is me, I am bested. Out-argued, I retreat to the godless liberal hole from whence I emerged.

    … I’m back. First, your “solution” solves precisely nothing, because it fully misapprehends the problem. Unemployment is a symptom, not a disease. It is a symptom that makes the disease worse, but you still don’t treat bacterial pneumonia with fever reducers, even though a fever will weaken your immune system. You attack the actual disease. The actual disease here is deflationary expectations about prices and the lack of liquidity they reinforce. Enslaving a fifth of the U.S. population and writing down a new unemployment figure to reflect that all these new indentured workers are now “employed” does absolutely nothing to fix the broader economy, especially if you’re paying them $2 an hour.

    Second, I suppose it does avoid government reallocating any resources … well, except for the labor that it confiscates from these people and redistributes upward. Wait, so … government redistribution of the assets of workers is okay? Help me out here. I think you may have lost me.


  37. 37 Morgan Warstler (@morganwarstler) August 26, 2011 at 12:03 pm

    mike I get it I really do, I know you want to see that thing curve up to the heavens.

    I linked to a graph accordingly.

    Here’s Mish on the subject a couple years ago:

    Here’s another when the gold window closed:

    Now, yes this does mean that I’m advocating a general – under 2% CPI approach, that TODAY Ben himself endorsed.

    You have to understand… the reason I like A NGDP level target (probably at 4%, maybe even 3%) is because at 3-4% RGDP, we’re raising rates to get 0% CPI if not deflation.)

    The Fed calls opportunistic disinflation. And it puts an immense premium on structural reform to generate real productivity gains (see my Guaranteed Income policy or my Tax SMB profits as capital gains policy my Fire the public employees policy).

    Because when you drive down prices ruthlessly, say end Davis-Bacon or the minimum wage, that’s when you get REWARDED with some low low rates to increase the money supply. Otherwise the computer that runs the Fed, just keeps raising rates every time prices nudge upwards.

    The economist Lacy Hunt does a very nice job explaining that we’ve run out of Monetary and Fiscal, and it is going to take some time to work though our problems.

    I Know, I know you think that there’s “no reason” we should have to suffer that fate.

    I’d put it to you, there was no reason Obama didn’t come in an immediately roll back EPA regs, increase drilling, overhaul the tax code, raise the age on entitlements, and deliver us 5% productivity gains every year at every level of government service.

    The problem is STRUCTURAL.

    One of the guys who sits on either side of David is going to be fired. More people are going to get out of the wagon and push, and the the government is going to scoot over and let SMB owners drive.

    We are going to become the United States of Texas, because that is the only way we will stay the shining light on the hill.

    Please stop telling me I don’t know math, and get down into what I’m saying IS HAPPENING. Did you not see ben’s speech today?


  38. 38 Morgan Warstler (@morganwarstler) August 26, 2011 at 12:38 pm


    I’m actually doing more than flipping the script on you… I’m letting you expose yourself for not grasping how micro-economics works.

    Start with what you get right. We ARE going to remove the basic needs of people who claim to want to work form the equation.

    They will get a check FROM US those of us who think people need their basic needs cared for – the taxpayers.

    NOW that they have their basic needs met, we can see what you don’t get.

    Yes, you will have to work, but you will get to CHOOSE amongst the jobs offered to you… picking up dog shit will likely carry a heavy premium, huh? Until somebody int he system looks at the bidding and says, “sold!”

    And since you are getting a Guaranteed Income, if you choose to babysit, or mow lawns, or do piece manufacturing, or telemarket from home YOU GET TO CHOOSE.

    The only thing you can’t do is choose to sit on your couch and still get a check. That is not slavery. And you are standing there mentally naked for even insinuating it.

    The second thing you do a horrible job at grasping is the benefits to the lower and middle classes because things like Daycare, hair cuts, and lawn mowing just got got cheaper. This is real productivity improvment.

    The third thing you aren’t getting is that IF the government will warrant that it doesn’t overbid EVER, you can make use of the system for public works.

    Frugal government is good government, and as a progressive, you have to learn that when you reduce the price of delivering public services, people will want more of them.

    The parks cleans and nice. Great! But if the government is going to have that, they are aren’t going to pay $1 more than it is worth in a private market.

    This is the new reality. Think of it as being neo-progressive.


  39. 39 Lewis August 26, 2011 at 1:18 pm

    I’ll quote you back your own language, because when you say “you will get to choose amongst the jobs offered to you”, I wonder how that reconciles with your own proposals:

    “1. There is no more minimum wage. 2. They have to take any job offered.”

    See why I’m confused? You say here that nobody is forced to work, and yet, if they don’t want to starve to death, they must take the first job offered to them. You don’t see why this is problematic? I am a factory, I come to you – unsolicited – and offer you, the unemployed worker, a “job” working in my factory for effectively nothing – say a penny an hour. (There’s no minimum wage now, remember?) The government, under your theory, /forces/ me to take that job under threat of starvation – because those are the stakes under your system, the personal incentives under the scheme you propose. Right?

    Hey man, I just read what you write and try to understand it. If I’m wrong, correct me.

    That was the first thing, right? That I didn’t get the difference between what you were talking about and slavery? “Work for me or you starve” is not, I think, substantially different from “work for me or I whip you.” But maybe I’m being melodramatic. I don’t think so, but live and let live.

    Okay, the second thing: that I don’t “get” the benefits to the people who employ these … we won’t call them slaves, we’ll call them happy fun time worker people. I think I pretty well described this phenomenon:

    “It confiscates [labor] from these people and redistributes it upward.”

    Right? That’s what you’re talking about? Yeah, I get that part. What I don’t get /about/ it is why it’s different from what I’m proposing. Why confiscation and redistribution of labor is different from confiscation and redistribution of taxes. Economics, remember? Not ethics? Just looking for the lines.

    The “third thing”, I must admit, I do not get. You want to use federal policy to increase demand via redistribution. And frugal? With no minimum wage, and guaranteed labor subsidies from the government, why on Earth would I as a business not scoop up as much free labor as possible? And how is that different from what anybody else is proposing? It certainly isn’t cheaper. Well, and the sla- happy fun time worker people.

    Government doesn’t “never overbid.” Of course not. But private actors also don’t “never overbid.” Everything you’re saying here is a tacit admission of what you expressly rail against – namely that the market won’t fix itself without the government stepping in to shift incentives. This is why I’m confused. You’re ouroboros-ing yourself.

    This brings me back to my theory. You’re can’t really argue with the fundamental economics of what the left is proposing. You only object on normative grounds to the idea that government should be allowed to redistribute wealth down. You have no normative issue with redistributing labor up, on the other hand, but you can’t bring yourself to admit that the lines you draw aren’t actually economic, so you use big words and capital letters and faulty charts to make it /look/ like economics.

    Lawyers have a saying: “If the law’s not on your side, argue the facts. If the facts aren’t on your side, argue the law. If nothing’s on your side, bang your fist on the table and scream real loud.”


  40. 40 jamesoswald August 26, 2011 at 1:35 pm

    I think this paper by Barro might lend some insight into his thinking:
    Government bonds are similar to fiat currency, except for a few things: they earn interest, they are less liquid, and they promise to destroy themselves after a specified time. Because they are temporary, you could think of them as having less or even no impact. Without the stimulative effect of issuing bonds, Barro might conclude that fiscal policy is ineffective.


  41. 41 Ottovbvs August 26, 2011 at 1:46 pm

    Warstler is a bore. Olympic level.


  42. 42 Morgan Warstler (@morganwarstler) August 26, 2011 at 2:22 pm

    “1. There is no more minimum wage. 2. They have to take any job offered.”

    Those are both perfectly within the boundaries of my argument.

    There is no minimum wage. Bidding starts at $1 per hour / per week.

    So if only one person bids $1 / $40, yes you DO have to take it.

    But in practice, there won’t be any $40 a week jobs… because at $40 a week, multiple bidders will find something for everyone.

    Look Lewis, i know this is hard for you to get, it requires thinking like an entrepreneur or at least an upper middle class family, or at least a middle class street.

    But at $40 per week, countless guys will roll dice on being able to you to work.

    Unless you are a mute, virtually every telemarketing firm in the US will hire you (from home) before they ever consider outsourcing to Bangalore.

    Unless you are a pedophile, 25M households will hire you to wash cars, clean floors, make beds, etc.

    Unless you are an idiot, at $40 per week it’s worth training you how to manufacture electronics.

    At $40 per week, 10 neighbors can go in an bid on you and chauffeur their kids around.

    Businesses will pay you to stand around spinning signs on the street.

    The reality is that at $40 per week, ROI can be returned on every American – and that’s WHAT this plan is really about. getting clear signals with the least amount of friction possible to all parties about the real market value of American workers.

    Also, it ends illegal immigration.

    If you look at the bottom of that post, you’ll see my suggested schedule (remember $5 per hour guaranteed is just a suggestion, it could be more)/

    But even at $10.50 per hour I still have workers getting flipped an extra $.25 per hour from the government.


  43. 43 John Hawkins August 26, 2011 at 2:39 pm


    1. What are your predictions on the level of fraud for such a scheme
    2. What makes this different from an earned income tax credit except that its broader?


  44. 44 Lewis August 26, 2011 at 2:41 pm

    “The reality is that at $40 per week, ROI can be returned on every American – and that’s WHAT this plan is really about. getting clear signals with the least amount of friction possible to all parties about the real market value of American workers.”

    The “real market value of American workers” is a dollar an hour? Okay then. I think I get now why you have no trouble capturing and redistributing labor. You think it has approximately no value, and you are therefore unbothered by its confiscation.


  45. 45 Morgan Warstler (@morganwarstler) August 26, 2011 at 2:48 pm

    Lewis, if I conscript you into slavery, and as your owner threaten to whip you if you do not work – that is bad.

    If you say, “I want to work!” then you are owed BY SOCIETY enough so that you might live. That is good.

    That you do not HAVE SKILLS that any employer can find return on – is YOUR FAULT, or it is SOCIETIES FAULT.

    But it is is not and cannot be the fault of potential employers that they cannot employ you under the current regulations and wages.


    All of this means we have a segment of the population who cannot live on what they are worth in the market.

    This is a fact.

    This fact does not go away by printing money. Because we cannot fiat that ALL people are profitable and self-sustaining.

    Forever and always unemployment is a function of price and clearinghouse efficiency. Ebay / Paypal solves for that.


    So then we start to build a just system:

    1. people have to want to work. check.
    2. society guarantees those who want to work a liveable income. check
    3. society wants to keep their costs down, so they auction those who want to work off to the private employers. check.

    This is efficient justice.

    Now we have a construct that you Lewis can work within.

    You want to increase the Guaranteed Income? Fine let’s discuss it.

    Because now the increase in GI is not borne by the employer. Now instead, we the tax payers directly have to pick up the tab on increasing the GI – after all we made the commitment.

    Because raising GI will not raise labor costs directly, only in as much as some people might do an even easier job for less money.

    Instead the employers and the workers are both incentivized to find and create value.

    AND AGAIN YOU MISSED IT, so I will assume you made a mistake on your first reading – you will have CHOICES between jobs. And you might choose to earn less to do something you like doing.

    Sophisticated algorithms get built to help people uncover the really talented babysitter or door to door salesman. People learn they are giving up $60 a week because they don’t want to pick up dog sh*t. They are ok with it. But for $5K more a year they can and will work in horse stables.

    Everyone has their price. Everyone has things they like and don’t like. We need to get the unemployed into a system and figure out whats what.


  46. 46 Morgan Warstler (@morganwarstler) August 26, 2011 at 3:07 pm

    John H, Fraud:

    First and foremost fraud is hard. You have to deposit money into the system. You have to win the bid. Think about that. Then, you have to let someone not work, and give you enough of their GI to win the bid again and again. While it is worth it to you AND them.

    Second, fear. If you cheat and get caught, maybe no GI for a year.

    Third. Greed, you as a bidder have a vested interest in not letting anyone cheat the system. You are always looking for a good deal. You want as many workers in the pool as possible.

    Forth, envy. You know a guy is cheating, and not having to work.

    Fifth. Greed and fear. You are an entrepreneur, you don’t want to EVER not be able to hire from this pool.

    EITC, this is a real stick. With this in place, basically all from of aid head this way. Oh you want Food Stamps? Are you in GI? You want medical care?

    These are really very positive things – it makes us all one big family.

    Look, the one thing that most people hate is feeling like they are getting a bad deal for playing fairly. People taking advantage of the system is cancerous.

    Admit that it is a cancer. Build a system that is very hard to free load, and you get the upisde of a far more forgiving and generous people.

    Tough love is only option this society has that still ends in love.


  47. 47 jmrm August 26, 2011 at 4:15 pm

    Morgan Warstler, I’m afraid I was too terse, and you missed my point. Your extrapolation of the NGDP was invalid. You drew a line, when you should have drawn an exponential. The number of workers available compounds every year: it’s an exponential. The number of consumers available compounds every year: it’s an exponential. The natural path of any economy is compound growth: an exponential. In fact, an economy that grows linearly rather than exponentially is drastically underperforming.

    Looking at your graph,, it’s pretty clear that the official prediction (blue) is an exponential. It’s also clear that the actual performance (red) is an exponential, with a dramatic (disastrous) drop in 2008, from which you again see the beginnings of exponential growth since. To those numbers, you fit a line (green) that overlays the 1980 part of the graph, and the actual 2008 data, but is too high in the middle and too low for the exponential trend at the end. That’s the classic mistake of overlaying a line on an exponential curve.

    That’s why the standard way of graphing the growth over time of an economy or a stock or an index uses a logarithmic scale for the y axis. The exponential (compounded) growth will look like a straight line.


  48. 48 David Glasner August 27, 2011 at 11:26 pm

    Simon, Yes, it is true that savings can be channeled back by banks into investment (i.e. spending on new capital). But this does not happen inevitably. The conditions under which it does or does not happen need to be sorted out and that is not so easy. But you seem to have identified a key issue. Not bad for a beginner.

    Philo, You are right that, in principle, monetary policy could work without fiscal policy. But there are good reasons why an intelligently structured program of government spending makes sense in a period of high unemployment and low interest rates. It’s the old principle of buy cheap and sell dear.

    Morgan, Sorry, but I couldn’t figure out what your graph was all about or where it came from. I see from the later discussion that there was a question about whether it was drawn to reflect a constant rate of growth or a constant increment of growth. It should have been drawn to reflect a constant rate of growth. The other point is that even if there was some real disturbance in the aughts that caused the trend line to temporarily or permanently depart from its previous path, it would just zag downwards the way I think you drew it. Anyway, that’s the best that I can do now.

    Greg, I think that you point out some potentially important issues for Keynesians and others to address. But you shouldn’t assume that those are the only ones to be concerned. My own view is that the sort of discoordination that you are concerned with is not necessarily the most relevant one to our current economic difficulties. And I think that Hayek would not necessarily disagree.

    Teageegeepea, I just looked at Williamson’s blog. Williamson has a point in saying that you can’t just make an observation and call it a market failure without putting the observation in terms of a model that identifies the source of the market failure. On the other hand, I think that the intuition that persistent 10% unemployment for 2 years is a market failure is pretty powerful, and models that seek to rationalize that sort of unemployment are not all that persuasive to most economists. So if Williamson wants to hang his hat on those models he is welcome to do so, but I don’t think that approach will get him very far.

    Stearm, Barro is no Schumpeter, but who is? And Schumpeter had many great insights was a great historian of economics, but he gave a lot of really bad policy advice.

    Eclectic Observer, You make a good point about the multiplier effect, which reminds that I should have already repeated a point I have made elsewhere on this blog, namely, that the Keynesian multiplier is merely the flip-side of Say’s Law (the object of Keynes’s ire in the General Theory), that supply creates its own demand. Increases in output induced by spending in turn finance further spending until resources are fully employed and total demand is sufficient to purchase the output produced by those resources. It’s the same idea considered from two different points of view.

    Barry, Your conclusions are a little more sweeping than I feel comfortable with, but to each his own.

    Ed, I think that you are getting worked up about a semantic point. Economics may or may not be a successful science, but I doubt that its success hinges on the existence of a definition that distinguishes between wants and needs. I think that John gives an admirable explanation of why economists (at least of the UCLA variety) don’t feel that there is much to be gained by trying to distinguish between wants and needs.

    Lewis, It seemed to me that the Republicans could have gotten an agreement that would have reduced all marginal tax rates and reduced government spending, and reduced the deficit. They refused to accept such an agreement because they would only agree to a tax reform that was revenue neutral even though the tax reform would have reduced marginal rates across the board. I don’t really understand why they would not have welcomed such an opportunity, but there are many things about this world which are mysterious to me.

    Morgan, So is Rick Perry on board with your GI proposal?


  49. 49 gregransom August 28, 2011 at 12:34 am

    Yes, of course you are right, David.

    But my firm base for saying more has been established.


  50. 50 Morgan Warstler (@morganwarstler) August 28, 2011 at 2:35 pm

    David, it’d be soooo much more interesting if you explained your position on my proposal.

    Sumner thinks it is grand.

    I’d love to hear your thoughts.


  51. 51 David Glasner August 28, 2011 at 2:57 pm

    Morgan, I you’ve got Scott in your corner, I would say that you’ve got it made. I’m a minor-leaguer compared to him. By the way, you did use a naughty word the other day. “S**t” is a no-no, but “poop” is fine. Don’t ask me why. That’s just the way it is. Sorry, but those are the house rules.


  52. 52 Morgan Warstler (@morganwarstler) August 28, 2011 at 6:11 pm

    and your answer is?


  53. 53 David Glasner August 29, 2011 at 8:44 am

    Morgan, My point was that there is no reason for you to care about what I think after having gotten Scott, a real force to be reckoned with, to endorse it. Nobody cares what I think about your proposal. I mean have you seen anyone trying to sell gold coins on my blog? But I will say that I am not in favor of minimum wage legislation or the Davis-Bacon Act, which you have said that you want to repeal. But in the real world, I see no more chance of repealing those laws than repealing ethanol mandates and subsidies, sugar quotas, and a hundred other special interest programs that I think are unjustified. Your specific proposal may have some merit, but it has really awful atmospherics, so I wouldn’t touch it with a 10-foot pole. Maybe if you repackaged it, it could actually get somewhere, but consensus-building doesn’t seem to be one of your many gifts.


  54. 54 Morgan Warstler (@morganwarstler) August 29, 2011 at 10:52 am


    You should read this:

    What you think of as atmospherics, if we accepted them as true, we’d never accomplish anything.

    The more personal challenge for you is this is a question in two parts:

    1. what if the only way you’ll really get a true change in Fed policy (target level NGDP) is by casting it CATEGORICALLY as anti-progressive. If it is the ONLY way, are you ok with promoting it as such?

    2. what if it really is an anti-progressive policy? Like God tells you, “target NGDP and we’ll end the New Deal..” do you still favor it?

    Because I view #2 as essentially true (timing matters), I tell you guys to do #1.


  55. 55 David Glasner August 30, 2011 at 11:56 am

    Morgan, Thanks for the link, a very interesting discussion.

    I am not promoting NGDP targeting or any similar variant of NGDP targeting on any grounds other than those I have already stated. You, however, have my permission to promote it for any purpose that you like. When God speaks to me, I will listen. Until then, I will look forward to reading your very creative take on the latest political developments, and hope that when the revolution comes you will put in a good word for me.


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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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