#Arkhaven INFOGALACTIC #Castalia House
I have to confess, I found this headline about the recent speech by the head of the International Monetary Fund to be mildly amusing.
“‘A return to the Great Depression‘: IMF boss ramps up pressure on EU with gloomy new recession warning”
Pity she didn’t read RGD back in the autumn of 2009.
Here is the interview with Alt Investors I did yesterday for those who might be interested. There are a few moments with some very bad buzzing on the line that lasts about five seconds each time, so consider yourself warned.
Since there has been an amount of interest in the topics being discussed, I wouldn’t mind having a transcript of it. If anyone is bored enough to type it up, please send it to me and I’ll post it here.
Albatross gets caught attempting to pull the old switcheroo:
There are two senses in which the multiplier is used. In one sense, the multiplier is used as a statistic about government spending (i.e. suppose the government spends one dollar more, if GDP increases by 1 dollar, you have a multiplier of one). In this case, you wouldn’t understand my point. In another case, the multiplier refers to a theoretically posited increase in private sector activity because the government enables an “injection” into the economy (this is the sense in which the money multiplier exists). I meant the second sense and most Keynesians mean the second sense. You can’t understand Keynes’s thought experiment vis a vis burying money (since no gov’t money need be spent) unless you understand the injection multiplier as opposed to the statistical multiplier. I can go into further details if you’d like but I this is enough for you to understand why we came to different extensions from your conclusion.
Albatross failed to recognize which multiplier was the subject at hand. The entire 2008-2009 debate over the multiplier, and the context of the ECB study to which the linked article was referring, solely concerned the “fiscal multiplier”, which does not render Albatross’s point difficult to understand so much as entirely irrelevant. For example, here is The Economist’s article on it, to which Paul Krugman subsequently responded in his post entitled “Multiplying Multipliers”.
The debate hinges on the scale of the “fiscal multiplier”. This measure, first formalised in 1931 by Richard Kahn, a student of John Maynard Keynes, captures how effectively tax cuts or increases in government spending stimulate output. A multiplier of one means that a $1 billion increase in government spending will increase a country’s GDP by $1 billion.
The size of the multiplier is bound to vary according to economic conditions. For an economy operating at full capacity, the fiscal multiplier should be zero. Since there are no spare resources, any increase in government demand would just replace spending elsewhere. But in a recession, when workers and factories lie idle, a fiscal boost can increase overall demand. And if the initial stimulus triggers a cascade of expenditure among consumers and businesses, the multiplier can be well above one.
The multiplier is also likely to vary according to the type of fiscal action. Government spending on building a bridge may have a bigger multiplier than a tax cut if consumers save a portion of their tax windfall. A tax cut targeted at poorer people may have a bigger impact on spending than one for the affluent, since poorer folk tend to spend a higher share of their income.
Crucially, the overall size of the fiscal multiplier also depends on how people react to higher government borrowing. If the government’s actions bolster confidence and revive animal spirits, the multiplier could rise as demand goes up and private investment is “crowded in”. But if interest rates climb in response to government borrowing then some private investment that would otherwise have occurred could get “crowded out”. And if consumers expect higher future taxes in order to finance new government borrowing, they could spend less today. All that would reduce the fiscal multiplier, potentially to below zero.
However, it must be noted that the notion of potentially reducing the fiscal multiplier below zero is practically – I should not have said theoretically – unthinkable, for the obvious reason that there has never been a time since the original publication of The General Theory that any of the developed economies has come anywhere close to reaching full employment, except for revised definitions of “full employment” that all fell well short of an economy operating at full capacity. No Keynesian or Neo-Keynesian spends any time whatsoever considering theoretical sub-zero stimuli, for the obvious reason that they tend to render the entire Keynesian perspective either unnecessary or counterproductive. The usual Keynesian claim is that fiscal multipliers reliably range from 1.5 to 3x… which has been shown empirically to be untrue.
Furthermore, Albatross not only erroneously attempted to apply the “injection multiplier” to a discussion that explicitly concerned the “fiscal multiplier”, but also defined the injection multiplier incorrectly. The injection multiplier is not “a theoretically posited increase in private sector activity because the government enables an “injection” into the economy” but rather “any injection into the economy via investment capital, government spending or the like [that] will result in a proportional increase in overall income at a national level.” It includes, but is not limited to, the definition he provided.
Returning to the orginal point, it’s not at all surprising that the fiscal multiplier has been determined to reliably be less than one. As I noted in RGD, Robert Barro’s study of federal spending in WWII demonstrated that even in the most commonly cited Keynesian success story, “the estimated multiplier for defense spending is 0.6-0.7”.
But that doesn’t mean we can’t occasionally give his corpse another whack with the shovel:
In the midst of the European debt crisis, economists at the European Central Bank just produced a paper that looks at how growth in the size of government affects economic performance. The authors, António Afonso and João Tovar Jalles, provide “evidence on the issue of whether ‘too much’ government is good or bad for economic progress and macroeconomic performance, particularly when associated with differentiated levels of (underlying) institutional quality and alternative political regimes.”
Here are some key findings.
We analyse a wide set of 108 countries composed of both developed and emerging and developing countries, using a long time span running from 1970-2008, and employing different proxies for government size […] Our results show a significant negative effect of the size of government on growth. […] Interestingly, government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries).
Basically, an increase in government spending (whether financed by taxes or by borrowing) reduces economic growth.
This is contra everything that is ever taught about GDP in mainstream economics. TheoreticallyPractically, it should not be possible that an increase in G could ever lead to a decrease in C+I+G+(X-M). The situation isn’t that supply-side economics is voodoo economics, it is that all mainstream economics is voodoo… except that it doesn’t work even when the target genuinely believes in it.
And for those who want to speak good economica, it can be phrased thusly: The multiplier is less than one.
There it is. And right in the most mainstream of the mainstream newspapers:
It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. Unemployment in both America and Europe remains disastrously high. Leaders and institutions are increasingly discredited. And democratic values are under siege.
Krugman is just wrong about one thing here. It’s not a full replay of the Great Depression, it’s a bigger, wider, and deeper one. Which, of course, is why I described it as the Great Depression 2.0 two years ago in The Return of the Great Depression.
Economic statisticians can utilize the climate scientists’ trick too:
The jobless rate declined to 8.6 percent, the lowest since March 2009, from 9 percent, Labor Department figures showed today in Washington. Payrolls climbed 120,000, with more than half the hiring coming from retailers and temporary help agencies, after a revised 100,000 rise in October. The median estimate in a Bloomberg News survey called for a 125,000 gain…..
The decrease in the jobless rate reflected a 278,000 gain in employment at the same time 315,000 Americans left the labor force. The labor participation rate declined to 64 percent from 64.2 percent.
This appears to be nothing more than the usual statistical shenanigans. By claiming that the labor force is shrinking, those who have left it are not counted as jobless, therefore unemployment is considered to have fallen, therefore more people are employed even though a smaller percentage of the growing population has jobs than before.
However, the more important number, the EPR, did continue to tick upwards to an unadjusted 58.7 percent, the same as last month. This means that the jobs situation is marginally better than one year ago, when it was 58.4 percent.
It’s perfectly understandable why so few people are paying attention to the crisis that is threatening the global financial system, even though the professionals are biting their nails like little children about to embark upon their first rollercoaster ride. In addition to all the confusing and esoteric terminology being thrown around more freely than medical terms on a hospital show – before being introduced to “House,” I didn’t realize that all medical conditions, no matter how rare, are treated with either surgery or steroids – it is hard to distinguish between the gravity of a Dubai corporation asking for a loan extension and the Italian government collapsing for the 343rd time since Mussolini fled Rome.
There is a certain amount of crisis fatigue now, even among those of us who pay close attention to the ups and downs of the global markets and the economic statistics. One can only anticipate disaster so many times before being tempted to throw up one’s hands and assume that the global economy is going to muddle through somehow, all apparent reason and evidence to the contrary.
Evil Kirk has a touching faith in the technocrats:
Evil Kirk: 11/21/11 6:47 AM:
The crash already came and went. If you view crashes in the 1929 sense or the “It’s a Wonderful Life” sense, you’re out of date and just worrying over a bogeyman. You aren’t going to wake up tomorrow to bank runs and general panic. We are largely in a post-radical economic discontinuity age. Too much is known, temporary technocratic leadership is too readily accepted, and people in general are too savvy and suspicious to tolerate radical discontinuity.
I just had to post this publicly to ensure it was on the record. It is indeed amusing and indicates the mindset of someone who I suspect doesn’t track a single economic statistic, let alone the ones I do. And here I’d thought the public mocking of the concept intrinsic in Reinhart and Rogoff’s best-selling book had finally killed off the theme “this time it’s different”.
I’ve been reading the second edition of Debunking Economics by Steve Keen and I’ve been reading it very slowly and carefully because it appears to be one of two things. If his criticisms are generally correct but his proposed alternatives are generally incorrect, (which is what I would presently conclude on the basis of a still-incomplete reading, but I am reserving judgment for now) this is the most important book on economics since Paul Samuelson’s 1948 textbook.
If, on the other hand, he is generally correct across the board, it is the most important book on economics since Adam Smith wrote The Wealth of Nations. Either way, it does to neoclassical economics what Mises and Hayek together did to socialist economics. It’s not a critique, and to call it a deconstruction would completely fail to do it justice. It’s a one-man gang bang. In prison.
On the casual level, my first impression was “Damn, I was right! I knew I was smarter than all those clueless PhDs babbling nonsensically about equilibrium and rational consumers with perfect information.” And my second impression was “Damn, I didn’t know the half of it. Keen is a freaking genius!” Needless to say, I will be writing a very detailed review/critique of it in a month or two. In the meantime, it’s highly recommended for those who grokked RGD and want to go deeper. There is a surprising amount of synchronicity between Debunking Economics and The Return of the Great Depression even though he is a professional academic coming from a left-wing perspective and I am an amateur
And just for the record… I should mention that Dirk Bezemer told me he probably would have included me with Keen, Baker, Shiller and the others on the famous list of the Bezemer 12 who saw the 2008 crisis coming had he known about my predictions prior to assembling it. But I’m hardly the only one; Investor Home has expanded the list to 45, including Ron Paul, Nassim Talib, and rather less credibly, Paul Krugman. I can’t say I’m terribly surprised to learn Dutch academics aren’t regular readers of the WND commentary page, but it is really a pathetic commentary on the state of economics to note that less than 50 people, out of all the various academics, analysts, and financial media talkers, managed to notice the global debt tsunami.
What is fantastic about Keen’s book is he explains, in great detail, exactly why nearly all academic and professional economists didn’t see it coming in 2008 and still don’t see it coming now. They literally cannot see anything of the sort due to their theoretical blinders.
The Bank of England is warning that we’re back in two-two-two thousand and eight:
The eurozone crisis has left UK banks unable to raise the funding they need to make loans to businesses, evoking the spectre of the crunch that followed the collapse of Lehman Brothers. And on one critical measure — the cost of insuring banks against going bust — lenders are already facing tougher conditions than at the height of the crunch, the Bank said.
For the benefit of those who don’t speak Central Bank, “on the brink of a credit crunch” means “we expect there to be a serious financial crisis within months”. In the spring of 2008, the bankers I knew were all talking endlessly about the tightening of credit and the senseless calling of major credit lines. And we all know how that turned out in the fall.