From the Quadrant blog:
The world’s economies are not suffering from a lack of demand, and the right policy response is not a demand stimulus. Increased public sector spending will only add to the market confusions that already exist…
There’s been much talk about ideological divides between tax-cutters and infrastructure and bonus spends in the wake of Kevin Rudd’s essay in The Monthly and the debate over the stimulus package. That talk, of course, obscures how close the two parties actually are, and an alternative way of looking at the issues might concentrate on the electoral coalitions which would benefit respectively from tax cuts or the combination of bonus payments that taper out as you go up the income ladder and education spending. Naturally, there’s an argument about which mode of proceeding would provide the greatest multiplier or have the quickest effect. But, in truth, the technical or policy differences are difficult to separate out from the politics. That doesn’t quite mean that ideology is dead, though, because the Quadrant essay by Steven Kates from which the quote above comes does show that there are those around there who are going to make a “private economic activity good, state intervention bad” claim almost regardless of the circumstances.
In a way, Kevin Rudd does have a real target for his claims about “neo-liberalism” even if his story has to exaggerate the influence of the purist form of the ideas underpinning it, and misleadingly imply that they’ve only influenced one side of politics. But most people aren’t aware of the arcana of “Austrian economics” and the sort of “let the market sort it out” line this quote exemplifies is going to stick to the Liberals and Malcolm Turnbull. And at the worst possible time. Turnbull’s low tax, small government rhetoric and his opposition to the level of state stimulus ensure that, even if his message is supposed to be more nuanced. And I’m sure most Australian voters aren’t all that interested in passionate arguments about the role of the New Deal in the Depression. Ideology? You can run, Malcolm, but you may not be able to hide.
You made 10 million last year, and tax breaks would have been great. Back then.
Your business is now looking at 3 million for this year, and even after letting half your employees go and cutting down dramatically on inventory a tax cut is pretty well meaningless because sales have plummetted and you are making a loss this year anyway. A tax cut won’t change a thing.
Taxation is not the question, or the answer this time.
You have to acknowledge the courage of those who advocate the free-market as a cure to the excesses of the free-market.
Shorter quadrant for those with limited attention spans and/or sensitive gag reflexes:
Sometimes, spending out of a recession doesn’t work, but occasionally it has. Tax cuts always make us feel better, but won’t get you your job back but will be excellent for those lucky sods who manage to hang onto theirs. It’ll also automatically shrink the dreaded welfare state, because we know that everyone on welfare is a lazy bum.
Typically, the numbnut who wrote the article proposes no other solutions. I suppose losing your job is an excellent way to stop paying taxes though. When will this idiot lose his?
The free-market can accomplish anything. It can even run down a financial system that is generated by printing money out of thin air. That must take some doing.
[You have to acknowledge the courage of those who advocate the free-market as a cure to the excesses of the free-market.]
Reminds me of the religious sects that refuse any medical help for their children so as to allow god to sort it all out.
[The world’s economies are not suffering from a lack of demand, and ]
Reminds me of collaborators who consort with and aid the enemy at the expense of their own countrymen. Here Quadrant like the Republicans are dreading Obama/Rudd proving them wrong and helping the country. No price is too large to pay for avoiding being seen wrong.
And I’m sure most Australian voters aren’t all that interested in passionate arguments about the role of the New Deal in the Depression.
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Yeah absolutely true.
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There’s a lot of denialism amongst those advocating liberal economics. For example there’s a carte blanche dismissal of the effects of the Gramm-Leach-Bliley Act on the scale of this meltdown. It’s not that I’m 100% convinced that allowing banks to play your savings in the stock market is a major cause of this, but the argument makes some sense. Yet there are people who are acting as if it doesn’t. As if it’s not something even worth rebutting.
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And yet Rudd is playing the same game. His piece spins ‘moral hazard’ to mean something it doesn’t and in blaming a lack of regulation for this mess likewise fails to mention that in addition to this ‘lack of regulation’ there was the assumption that the govt would bail banks out. There are all sorts of factors at play here that Hayek would not have approved of and Rudd acts like he was the Grand Designer of it all.
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He then returns to Keynes and fails to mention that Keynes’ theories were not entirely peerless and that they suffered from the same political distortions and that the economic regime established in his name eventually ran aground. Surely after the century of Friedman v Keynes type ideological ping-pong we should’ve progressed – but no.
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If you’re disinclined to adhere to an economic orthodoxy and yet are interested enough to learn a few things and ask questions eventually you run into the stone wall of ideology. Whether you turn left or right. And, exasperated by this, you simply switch off or vote with your feelings.
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Ideology? You can run, Malcolm, but you may not be able to hide.
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Depends doesn’t it. If Kevvie’s Social Capitalism proves a fizzer than Turnbull will start looking pretty good. Kevvie is not FDR. He simply doesn’t inspire.
Keynes?
FDR never pushed public expentiture much above 20% of GDP during the Depression.FDR never really implemented Keynes. He did when war broke out on 1941 and then public expenditure went through the roof. And we all know that the war pulled the US out of the Depression. Or maybe it was Keynes, after all.
Yeah yeah yeah and Hayek wouldn’t have liked Howard. Does it matter?
“You have to acknowledge the courage of those who advocate the free-market as a cure to the excesses of the free-market”. Quote of the day
“Yeah yeah yeah and Hayek wouldn’t have liked Howard. Does it matter?”
Only if people think FDR actually did implement Keynesian policies and they failed and therefore Keynes’ ideas don’t work because of that.
Then it really is important that Hayek wouldn’t like Howard.
Anybody that thinks we live in a free market system needs their head read. The oh, so cozy relationship between the big end of town and the regulators is obvious to anybody with an ounce of common sense. Interesting that most of them (the regulators) are still running the show. Change you can believe in!
Let me say straight out that this talk of Keynes and such economic theory is waaay over my head.
But.
I was wondering how that stuff stacks up in today’s world as compared to the world of a few decades ago. Does it take into account the high level of personal/private debt, the increased number of mum-and-dad shareholders and the impact of instant global communications? I guess I’m asking if the psychology of the 21st century market matters…
We’re a cynical mob. Or maybe I just want to think we are.
mars08, the Quadrant piece doesn’t address the most important difference between the world that Keynes tried to influence and the world that we live in.
That is the globalisation of finance. Keynes wrote about a world in which national economies were almost hermetically sealed from each other and in which it was difficult to transfer capital from one jurisdiction to another.
Now you and I can do that with the click of a computer mouse. This fact imposes huge limits upon what governments can do to set national policies and priorities.
Nations that diverge too far from the world consensus, in practice set by the US, are punished.
The interesting features of the current period are that the US is losing some of that influence and that Barack Obama may set a set of national priorities in the US that are quite novel, at least since the 1960s.
Well, Roosevelt did go for intentional deficit spending after the downturn of ’37. I don’t know the percentages involved but I’m sure the increase in the US budget deficit from that era is more comparable to what governments are doing now than what was spent during WWII.
But of course the Great Depression crisis was slightly more pressing than what we’re facing now.
It’s interesting that US academic economists are lining up on their own blogs in totally predictable opposing ideological positions on the fiscal stimulus debate.
In one corner, leading the forces of the libertarian right, is the doyen of efficient markets theory and now leader of the Chicago school (since Friedman’s death), Eugene Fama.
Fama is advancing the case that government spending and borrowing is merely stealing the oxygen of the private sector.
Leading the opposing forces from the left is NY Times columnist and Nobel Prize winner Paul Krugman, who accuses Fama of completely overlooking seven decades of economic thought.
Is it any wonder that when even heavyweight economic thinkers can’t agree on first principles, the politicians fight this on their same old and tired chosen territory?
I have my doubts also that Keynesian nation state-based pump priming can do anything more than ameliorate the symptoms of a crisis that is global nature.
What we are seeing is the demise of the post-70s economic model driven by globalised financial institutions working under the banner of the Washington consensus.
Like dazed survivors after a holocaust, our policymakers are stumbling around in the wreckage of the global financial architecture and fumbling for the only tools at their disposal.
For now, though, until someone comes up with a better plan, this will have to do.
Yeah, I figured the “globalisation” of finance was going to be the major complication… but I was wondering about how much the governments could influence the consumers attitudes given the instantaneous spread of bad (but not always relevant) “news”. And how an ageing population (drowning in debt and liquid assets) would respond to stimulus.
It looks to me like a complicated animal to motivate in hard times.
From what I’ve read, it wasn’t until a couple of years after the NYSE crash of October, 1929 that things REALLY started to go rotten. Or maybe I’ve been reading the wrong sources.
Of course events in today’s wired world COULD move along much quicker.
To a large degree the success of Rudd’s stimulation package is hostage to the behaviour of baby boomers.
Baby boomers still comprise a huge proportion of the population in general, an even bigger slice of the working population, and they are at present in possession of the lion’s share of the nation’s assets, both as individuals and as participants in some truly gargantuan superannuation funds.
Some boomers are comfortably off, in secure jobs, in pension schemes that are immune from all but a total meltdown of the financial system, but anecdotally it appears to me that many boomers have taken major hits in superannuation and many of them have refinanced their houses for various purposes, including direct investment, in the now burst equities bubble.
As taxpayers and as persons qualified by other means to be in receipt of Rudd’s proposed handouts, these boomers view the Rudd money as tiny in comparison with the financial hits they have already taken.
The money is nowhere near enough to sure up their equity. But no doubt many boomers will use it to draw down debt rather than to spend. That’s the opposite of “stimulus”.
And if, as is likely, real estate prices take a serious tumble, then many boomers’ bankers will require them to liquidate still more assets. This again is the opposite of stimulatory.
So, like Mr Denmore, I’m dubious that the package will achieve its intended effects.
From what I’m seeing is this thread, it seems that there’s little faith in the capacity of Rudd’s adrenaline package OR tax cuts to get the boomers (and/or Howards aspirationals) back on the consumption rollercoaster.
And that’s here in our tiny corner of the swamp. What’s it going to take to break America’s inertia? I worry about how they are going to cope is six months, when the euphoria over Obama fades and they realise he’s just an educated guy stuck with the same blunt tools.
Then again Katz if housing prices ‘collapse’ in the sense of return to historically normal levels compared to average incomes – which from memory would require them to fall by about 50% – it might allow lots of people who have given up thoughts of buying real estate to enter the market and start spending money on things for their new houses. Truth is it’s all completely speculative – that’s why academic economists can contradict each other with such impressive arguments; they simply make wildly different assumptions about future behaviour but each set of assumptions is plausible.
I’m no economist but I have studied dynamic complex systems theory and I believe one might just as well study the entrails of a bird as use any kind of model to predict the future course of the global economy. There are simply too many unknowable variables.
I’ve just read that Quadrant piece. I was expecting some kind of uninformed rant, like you so often get from both right and left on economic matters, but it’s actually much better than that. I disagree with the author’s conclusions, but he presents the anti-Keynesian argument about as well as possible.
There is one specific point that is worthy of further discussion. To what extent are the Rudd stimulus packages actually ‘Keynesian’?
I always thought Keynesian stimulus = government spending. The Rudd spending on schools and councils and other infrastructure would certainly count. But what of the $950 bonuses, or the $1400 pensioners got last year?
In terms of ‘aggregate demand’ theory, the recession is coming about basically because people just ain’t wanting to spend money. Now, will $950 (about 2% of annual income for someone on the average wage) actually trigger a significant rise in the average propensity to spend? And if it doesn’t, what’s the point? (This is similar to what Katz is saying above.)
If Rudd genuinely wants to be ‘Keynesian’, why not put it ALL — every cent — into infrastructure? Sure the lead time is longer — but this may well turn out to be a prolonged recession. Sure there is the problem of government waste — but with the more sophisticated cost-benefit analysis we have these days, waste could be minimised (touch wood).
At least when government spends money, it can be sure that every penny actually does get spent. The same cannot be said for the $950 bonus.
If anyone’s interested in a reasonably argued view from the right about the arguments against Obama’s package, I recommend this Myron Scholes forum, featuring three Chicago school economists.
Of course, these guys all have tenure, so you have to discount that in their quite noticeable playing down of this event as just a normal part of the cycle.
The correct link is here:
http://gsbmedia.chicagogsb.edu/GSBMediaSite/Viewer/?peid=439a24a984fa449a8833412955afac45
KL, I agree with your statement about the foolishness of making firm predictions about the behaviour of dynamic, complex systems.
I think those observations may also apply to this:
If there were a 50% drop in residential real estate in Australia, naturally one would expect housing to become more affordable. However, the housing forced on to the market would be houses in default, i.e., to a great extent those properties owned by the banks. This phenomenon undermines the bank’s ability to lend finance to fresh borrowers, or for that matter to many would-be investors.
Everything else being equal, as a result, business activity would take another turn into the deflationary, depressive spiral.
It was precisely this phenomenon that Keynes wanted to combat. He saw the deflationary, liquidationist road to “recovery” to be too hard and unnecessary.
Allowing the boomers to collapse is anti-Keynesian. But as you say, supporting them is a cross-subsidisation by younger folk who have never enjoyed the advantages of boomers.
Boomers are such pesky critters!
Agree Katz, that’s why I wrote ‘might’ and not ‘would’.
I don’t understand why the housing market would be dominated by default mortgage stock. Why will people not be able to keep up their mortgage payments? Treasury is only forecasting 7% unemployment and interest rates are coming down, it’s not as if we are facing a collapse in disposable incomes. Well not if you believe Treasury forecasts, anyway. And if you are suggesting that people would simply abandon their homes once they have negative equity – well I just don’t think many home owners would behave like that, but again we are in the realm of speculation.
Also, the last time I looked, more than 15% of the Australian housing stock was not occupied; i.e. houses were used solely for holidays, or for overnight convenience when someone has to work late, or bought for capital gain and the owners don’t rent them out and so on. Now quite a lot of these are in holiday towns where nobody wants to buy a residence but a lot aren’t. It seems to me they are the ones that could come on to the market and force prices down without any appreciable harm to the overall economy.
It’s a matter of relativities.
There is always a background market in residential real estate — deceased estates, people moving because of job changes, etc.
Of more interest are the houses that would not otherwise have been sent to market. In the present conditions, these are houses that must be sold because of financial distress (mortgage default being a major reason).
In the present market, no one who doesn’t have to sell is selling. In Victoria, resort homes are being dumped at the moment. Their owners have to sell to protect their core assets. Bathing boxes, a bijou status symbol, have collapsed in price.
Thus the general shape of the RE market ATM is lower turnover, but a higher proportion of that turnover being forced by financial distress.
This may change if a flood of distressed RE hits the market. Folks won’t be selling because they want to, it will be because they have to.
In a depressed market, people change jobs less frequently and tend to hang on to deceased estates until the market improves, accentuating the relative importance of distressed estates.
“It would be an absurdity to suggest the problems now being experienced have been caused by consumers no longer wishing to buy more than they have”
er … can anyone explain why this suggestion would be absurd? I thought all this data to do with falling retail sales, falling car sales, tightening credit etc would indicate just that. Not that I’m saying that throwing great piles of cash around is the answer, it’s just that I understand how a quite well credentialled dude ccould justify this statement.
Social Democracy’s Labour of Sisyphus.
The other point to note about housing is that there are factors which tend to maintain prices or decrease the fall in prices outside the speculative housing boom cycle – viz. demand and supply. That’s one reason why rents are still high. Also worth noting that the housing market is by definition much more localised than markets for goods – so in Brisbane, for instance, prices haven’t fallen as they have in Sydney.
There are two reasons, Katz, why that may not matter all that much (though it’s equally as plausible a response to regarding the bonus as trivial compared with debt to spend it rather than add a drop to the ocean).
Firstly, a lot of the said baby boomers would have incomes above the thresholds where the bonus starts to diminish in size – they’re actually not targeted.
Secondly, there’s a multiplier effect assumed from the spending. That’s why it doesn’t matter that much if not all of it is spent (and also if it does make a difference to people’s debt levels, it frees up more of their income for spending – which is likely to be spent if they’re low paid).
Peter Martin refers to the evidence the Treasury is relying on about the propensity to spend:
http://petermartin.blogspot.com/2009/02/so-why-does-treasury-believe-well-spend.html
Is Turnbull making a committment to permanent expenditure reductions to match permanent tax cuts once the economic crisis is over? This seems unlikely, we may be seeing the conversion of the Liberals to Reagen-Bush II fiscal policy.
There is no doubt, Kim, that Rudd’s package will have some sort of stimulatory effect.
The questions are:
how much and how long?
whether the money might have been targeted more precisely at those with a higher propensity to consume?
The article Martin cites notes that there is a large difference in that propensity between high and low income earners. Many boomers fall under the current threshold. It is worth considering whether that threshold should have been set lower and the amount of money given to the lower earners increased.
Geoff – I very much doubt it. So much for “economic management”.
Katz – sure. I agree that would probably be desirable. But I think, as I said in the post, the economics and politics are hard to separate out. It probably goes up the income distribution more than it might reasonably in order to maximise political support.
Paulus, in political discussions Keyensianism is often associated with government spending, but in economics it is much broader than that. First, it is a crtique of the classical paradigm that rejected the idea that insufficient demand could be the source of recessions. Second, it looks to price and wage rigidities to explain why economies don’t return to equilibrium quickly after shocks. Third, it proposes that judicious government intervention on the demand side (monetary policy, government spending, tax changes) can help the economy return to equilibrium more quickly than if the economy was left to its own devices. It is summarised in the basic IS-LM framework taught at undergraduate level. Things are obviously more complicated than that – the right Keyensian stimulus depends on whether the economy is open or not, and whether there are capital controls – and there are modern variants – post-Keyensianism, new-Keyensianism, etc. One of the major innovations in the period after the oil shock is that both the supply and demand side matter when setting policy. After that oil shock, most governments/central banks reacted by trying to stumulate the economy through traditional means. The problem was that it was a supply shock and not a demand shock. That meant that potential output had fallen and that attempts to stimulate by drastically cutting interest rates or increase government spending were likely to be inflationary. The subsequent inflation took nearly 20 years to beat out of the system and undermined the Keynesian approach to policy. What we are now seeing is another rebalancing in the approach to policy, as well as a recognition that the previous ignorance of financial imbalances in policy setting was inappropriate.
Brendon – Only if people think FDR actually did implement Keynesian policies and they failed and therefore Keynes’ ideas don’t work because of that.
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Good point.
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The point I was making is about general ideological dispositions and their effects. Rudd, for example, has connected Hayek, neoliberalism and the Liberals. Now neoliberalism is not just something the Libs or the Republicans or the Tories did. Clinton, Hawke and Blair were all enthusiastic ‘neoliberals’. But the corporatist skullduggery, the continued expansion of the security apparatus/MIC and the political levers that bailed out such as the dotcom bubble – all ‘neoliberal’ phenomena – were not exactly Hayekian measures.
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Neither is Kevvie’s current spending spree Keynsian. According to Keynes (insofar as I understand him) heaps of people have to be on the dole before you blow the surplus.
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You’re right about the conflation of individual economists and political ideologies. It’s a problem. But I think that the excusing of ideologically motivated strategies on the basis of ‘they strayed from the true path’ is also a problem.
Adrein, that isn’t right. If you wait until the unemployment rate has risen before stimulating the economy, you will have acted far too late. Policymakers have to be forward looking because of the lags associated with policy changes. Keynes wrote before before dynamics (rather than comparative statics) were properly incorporated into economic analysis.
LO – Adrein, that isn’t right. If you wait until the unemployment rate has risen before stimulating the economy,
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I didn’t say it was right I just brought it up as an example of the difference between what Keynes said and ‘Keynsian’ policy. ‘Keynsian’ generally denotes ‘Social Democratic’ approaches right? As in a market economy with comparatively high govt involvement and regulation levels.
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Just as a “Friedmanite’ approach tends to denote hands-off. There would be many differences I suspect between the policies of ‘neoliberal’ governments and what Hayek or Freidman wrote. But there’s a generally perceptible paradigm set.
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The trouble is that those who advocate one paradigm seem to be most correct when they are criticizing the other paradigm. The adherence to economic ideology sems to me theological and that makes for problems because its only when your own paradigm fails badly that a different approach is adopted.
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But I really have no idea. The more I learn about economics the more confused I become.
Kates’ ‘Quadrant’ article reveals a fatal flaw in its very first line:
‘The Great Depression, in most places, began with the share market crash in 1929 and by the end of 1933 was already receding into history.’
He then proceeds to argue that the countries that had pulled themselves out of recession by 1933 had implemented non-Keynesian programs and implies that it did not happen in the USA because of flawed New Deal programs.
Roosevelt, however, did not take office until 1933, by which time, according to Kates, the Depression in the USA should have been ‘receding into history’. To the contrary, his own figures demonstrate that it was getting worse. He offers no explanation for this, unless he is implying that Hoover was a closet Keynesian. His interpretation of empirical data in other words is totally misconceived, to put it mildly.
The extent of the revisionist history of the Depression being peddled by conservatives is startling. Maybe it reflects the skills they’ve honed in creative interpretations of climate data.
Maybe it reflects the skills they’ve honed in creative interpretations of climate data.
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I suspect vice versa.
Ken Lovell, you said”Roosevelt, however, did not take office until 1933, by which time, according to Kates, the Depression in the USA should have been ‘receding into history’. To the contrary, his own figures demonstrate that it was getting worse. He offers no explanation for this, unless he is implying that Hoover was a closet Keynesian“.
Well, in every sense apart from the name, he was. And not a ‘closet’ Keynesian either, he was proud of his interfering.
As Murray Rothbard points out in ‘America’s Great Depression,‘ which focuses principally on the Hoover period :
“Led by President Hoover, the government embarked on what [economic historian Benjamin M.] Anderson has accurately called the “Hoover New Deal.” For if we define “New Deal” as an antidepression program marked by extensive governmental economic planning and intervention – including bolstering of wage rates and prices, expansion of credit, propping up of weak firms, and increased government spending (e.g., subsidies to unemployment and public works) – Herbert Clark Hoover must be considered the founder of the New Deal in America. Hoover, from the very start of the depression, set his course unerringly toward the violation of all the laissez-faire canons. As a consequence, he left office with the economy at the depths of an unprecedented depression, with no recovery in sight after three and a half years, and with unemployment at the terrible and unprecedented rate of 25 percent of the labor force.
Hoover’s role as founder of a revolutionary program of government planning to combat depression has been unjustly neglected by historians. Franklin D. Roosevelt, in large part, merely elaborated the policies laid down by his predecessor. To scoff at Hoover’s tragic failure to cure the depression as a typical example of laissez-faire is drastically to misread the historical record. The Hoover rout must be set down as a failure of government planning and not of the free market. To portray the interventionist efforts of the Hoover administration to cure the depression, we may quote Hoover’s own summary of his program, during his presidential campaign in the fall of 1932:
“We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action…. No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times…. For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered…. They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.
“Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for … “the common run of men and women.” Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom…. We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.”
Combine that understanding with a perusal of the Industrial Production figures for Australia, NZ, the UK and the US for the years in question, and you realise that Mr Lovell’s assertion of a “fatal flaw” in Kates’s article is itself based on an incomplete understanding of history.
K.L. said:
On the contrary Ken, it’s the same people who revised history to prove that Roosevelt saved the US by implementing the New Deal who made out Hoover was a Laissez-faire President. As Peter Cresswell @40 shows, this is just not true.
Here is an article on how Roosevelt prolonged the depression, just to get you up to speed.