NewsHour video

Skidelsky argued that Keynesianism was somehow was needed to save the world from tyranny in rough economic times. This doesn't make much sense to me at all. Look, Germany had a robust welfare state and lots of state spending BEFORE the Great Depression began; the Nazi regime did nothing to undermine such and of course expanded that state spending as well as that welfare state. It really makes no sense historically to make that argument when the worst of the worst of the dictatorships were following Keysenian-like and social welfare policies before the crisis broke.

No, that "just so" story will simply not do.

Who is this Skidelsky shyster? “The waste doesn’t matter?” Are you on crack?

Actually, rephrase: How much crack are you on?

Seriously, Russ, is that an acceptable statement now in the academic world? I know Keynes made effectively the same argument, but good lord, when you’re $1.4 trillion in the hole, and proposing a new $4 - $5 trillion entitlement, no one should be allowed to say that unchallenged, or without a good punch to the face...

I am disappointed that the video did not feature any of Russ' (indeed common sense's) better arguments.

Of course the friggin' brit was up for spending, spending, any kind of spending. What a joke!

I'm curious to hear Russ's take on the produced segment relative to the actual interview.

Was it just me, or did the interviewer seem to understand the Keynes position better than Dr. Roberts' position? (I say "Dr. Roberts' position" because Hayek was mentioned so little.)

The most insightful point in the video was when skidelsky said that "yes markets will eventually correct but it's politically infeasible". Finally, an honest Keynsian. Someone willing to correctly call out Keynsianism as a political philosophy, not an economic one.

Exactly. Skip the supposed calculations in Keynes and proceed directly to the political objective which he lays out in the notes. Everything one needs to know about Keynes is spelled out there in a few short paragraphs. He was a propagandist, not an economist.

RUSS: "Well, Keynes may have had a point about X, and it's clear there are many who believe him..."

SKIDELSKY: "I don't believe in voodoo! I won't believe in voodoo! Animal spirits! Animal spirits!"

What I took away from the exchange was two-fold:

1) Skidelsky seems to have a hard time understanding the unseen. Arthur C. Clarke had a relevant quote about this, that "to the uneducated native, technology is akin to magic."

Skidelsky can't seem to fathom bottom-up organization, so he dismisses it outright. After all, it can't be properly forecast or controlled, so why bother? It won't fit into neat calculations.

Aggregate demand can be measured as a quantity, but it can't be measured in terms of quality. Congratulations, you just spent 1.5-trillion dollars! But what did you purchase, exactly?

2) Russ was too nice, or at least he was edited to appear that way.

Where did he dismiss bottom-up organization? I missed that part. I'm guessing he accepts bottom-up organization, like pretty much all economists do - he just also recognizes the very real possiblity of bottom-up disorganization.

Prices carry information about quality - you don't measure GDP in tons or gallons. You measure it in dollars precisely because we want to get a sense of quality and value that is produced.

"Prices carry information about quality - you don't measure GDP in tons or gallons. You measure it in dollars precisely because we want to get a sense of quality and value that is produced."

Isn't that circular? In fact, it's circular on two fronts.

On the first front, a significant percentage of GDP during the boom phase of the cycle is from malinvestment. That's a correction which needs to happen.

On the second front, just because the government buys a tank for several million or more dollars doesn't mean there's now several million or more dollars of wealth. Which, I believe is Ike's point.

On your first front - definitely. It only measures subjective valuation. What other kind of value is there? I value the laptop I'm typing on a great deal, but someone 100 years ago (and someone 100 years from now, for that matter) probably wouldn't. So yes - it is all subjective valuation, and yes, when you have irrational exuberance the whole problem is that subjective valuation is out of whack. So it's not perfect, and it's certainly not the only measure of human satisfaction, but it's decent enough and you're certainly wrong to say "it can't be measured in terms of quality" above. It can be measured in terms of quality - that's what prices are. It's just an imperfect measure. What measure isn't?

On your second front, that's easy - look at real GDP, rather than nominal.

I had the same thought while reading Keynes. Over and over he simply dismisses anything that can't be reduced to easy calculation. To his credit, he makes a point of dismissing, so it can be said that he is "honest" I suppose, but he still dismisses, and then proceeds to draw conclusions that fail to take into account all that he has dismissed. My thought while reading it was that this is how computer games are designed - focus on a few chosen factors to allow the person at the keyboard the illusion of control. Great method for a computer game, but its no way to actually try to run an economy.

Good, but almost no mention of Hayek. Is the entire rap video out yet? or still a work in progress?

Gaaaah, that guy is droning on again about "aggregate demand!!!" ;-)

Outstanding!!! ;-)

Keynes was the original man of the system. A government man. A man who got his start by raising money for the British war effort (WWI). And what have his ideas actually produced? Bigger government. Big surprise. So yes, in the future we are all dead... or working for the government.

Completely agree (obviously from my comment later in the thread). +1

Keynesianism goes hand in hand with the warfare state.

It also produces more simpering, effeminate know-it-all wonks like Daniel.

It's unfortunate that the only time the liquidity trap came up was in the rap towards the end. Your arguments make a lot of intuitive sense - except in a liquidity trap. And Skidelsky's arguments come across as leaning too heavily on accounting identities - except, of course, in a liquidity trap when they make a lot of sense. And yet it never came up. It never comes up on here either. You and Don act like you can make pronounciations on what Keynes is or is not using this simple "spend yourself to prosperity" caricature of Keynes, without ever engaging the fact that interest rates are either at zero or (if there are risk premia and time preferences to take into account) at some other de facto price floor. And yet at this price floor we still have savings well in excess of private investment demand. That is the fundamental problem that is pinning us down here, and yet it doesn't receive any treatment here, and it doesn't receive any treatment in the talk with Skidelsky.

You believe in the concept of the "liquidity trap"? The solution to this alleged "lose-lose" situation that demands government spending is simply a downward movement in prices.

No, it won't happen overnight. But booms don't happen overnight either. Economies and markets take time to adjust to new expectations of the future. However, as someone who lost their job last year -- it didn't take long to realize that the "price" of my labor had dropped by about 20%.

Prices, wages all adjust -- I agree that they're "stickier" than the price of a barrel of oil but that doesn't mean you can circumvent the market process. A downward movement in prices will alleviate the "liquidity trap" and allow people to keep nominal cash balances the same while increasing their real cash balances. The reason that people won't borrow more in a "liquidity trap" is because they're trying to rid themselves of debt. It's a natural part of the deleveraging process. Allow prices to fall. Allow wages to fall and, voila, people will start spending again.

A drop in prices would exascerbate the liquidity trap by raising real interest rates.

But yes - if you let your existing capacity depreciate, rot, and decay in an extended depression investment demand will pick up eventually and the market will clear again. But the point is the wealth you've destroyed in the process (as Bastiat calls it, the seen and the unseen). Any price floor has one dependable consequence: deadweight loss. A liquidity trap is fundamentally a price floor. You suffer real deadweight losses from it.

"But yes - if you let your existing capacity depreciate, rot, and decay in an extended depression investment demand will pick up eventually and the market will clear again. But the point is the wealth you've destroyed in the process"

The wealth was destroyed in the boom phase of the cycle.

Not the dead-weight loss from the price floor - just the misallocated capital that is being deleveraged. The dead-weight loss from the price floor is new destruction.

But yes, certainly the problem is that it was misallocated in the first place. I've never argued that point. If you invent me a time machine to prevent that, I'll drop my advocacy of fiscal stimulus. In the meantime I see no reason to destroy additional wealth by just living with a price floor (particularly if there are reasonable public goods available to invest in).

This is exactly the sort of thing that we should expect out of the stimulus (in other words, this is the U.S. in microcosm and this is where we are all headed): http://www.sfweekly.com/2009-12-16/news/the-wor...

Is that the right link? What does that have to do with anything?

As I stated, it is an example of where we are headed.

OK - so if I choose to share that with anyone, and they ask "why?" I should just say "because Mommsen1625 said so"? Gotcha.

Welcome to the nature of blogging.

The dead-weight loss is the direct result of government intervention; more government intervention will not remedy this, only make it worse - as happened in Japan in the 1990s.

How is deadweight loss from the price floor in the loanable funds market the result of government intervention? You're going to need to explain that one.

I don't agree with this.

Daniel, you hold $100 in cash balances. You refuse to borrow more money because you're in debt up to your eye-balls and need to deleverage. If demand is artificially propped up by government spending, this only increases your desire to hoard cash as you need to keep your real cash balances in line with the inflation caused by government money creation.

If, on the other hand, we allow the market to clear, your real cash balances increase. Cash stays the same, your outstanding loan balances stay the same, prices -- however -- fall allowing you to have higher real savings (thereby accomplishing your goal of deleveraging).

I'm quite familiar with the seen and the unseen ... and I believe what you refuse to see is the cost of government intervention. Aggressive fiscal policy will push money into the economy but it will do so in ways that create perverse incentives, back room dealings, and rent seeking.

So you see the downside of letting a market clear but not the downside of government spending?

I don't disagree that there will be suffering as a result of a shock to the economy (I'll be generous and ignore government caused recessions) ... but the economy (and you and I) need to take our medicine and move on. Bandaids don't cure wounds ... time does.

Edit: Grammar.

Well right - it's precisely because everyone is deleveraging that there's a drop in investment demand in the first place.

"Government money creation" is a tricky issue. In normal circumstances, I'm pretty much a monetarist. But in liquidity trap circumstances, I agree that creating money doesn't help anything (and quantitative easing as a method for creating money probably makes things worse). As Keynes said - getting out of a depression by inflating the money supply is "like a thin man trying to gain weight by buying a longer belt".

So I agree with you on money creation - but perhaps you also mean "inflation caused by government borrowing" (if you don't mean that, there are many people out there who are worried about this). The whole point of government borrowing, though, is to make use of underutilized resources. There are no substantial inflation pressures out there right now. Nobody that I've heard of has produced a projection of substantial inflation. Once inflation does pick up, that's actually a good sign - it means fiscal stimulus is starting to self-neutralize, which means we can stop doing it!


RE: "If, on the other hand, we allow the market to clear, your real cash balances increase."

The whole problem is the market can't clear. If it could, I'd agree with you completely.

RE: "I'm quite familiar with the seen and the unseen ... and I believe what you refuse to see is the cost of government intervention. Aggressive fiscal policy will push money into the economy but it will do so in ways that create perverse incentives, back room dealings, and rent seeking."

I'm perfectly aware of and concerned about these risks. That's why I'm thrilled that you can look up the thousands of recipients of these grants online. You couldn't do that in the 30s. There are always these risks - so we need to use the tools we have to minimize them. That sort of things will destory wealth and destroy value - then again, so will a price floor and dead-weight losses.

RE: "So you see the downside of letting a market clear but not the downside of government spending?"

I'm not sure what you mean - I want the market to clear - I wish it could, and I do see the downside of government spending.

Several comments:

1. The underutilized resource (capacity for government to borrow) is only underutilized to the extent that it can raise taxes. You're advocating theft and redistribution of wealth as underutilized resource. There are only two ways for government to repay debt: theft from the few (taxation) or theft from everyone (inflation). I would prefer no theft.

2. You said so yourself that the market would clear (eventually)... we can dispute whether a government led recovery or a market led recovery would happen faster ... but I'm assuming that we both agree that having done nothing, a market will eventually clear and normal production will resume.

3. Your continuing reference to a "price floor" -- I'm assuming that you mean a price of money floor? In that the interest rate is zero bound? How is the goverment increasing aggregate demand not the instantiation of a price floor? In a Crusoe economy, where the price of coconuts has to fall, the government stepping in to purchase coconuts (to boost demand and spending due to a liquidity trap) will only increase (or maintain) the price of coconuts.

4. By the way, those websites to track stimulus spending are great. You can pinpoint all of the fraud involved. The problem is that there are no consequences for fraud. No one is being thrown in jail. The "jobs created" numbers are absolutely false. If you're interested, I'll send you an online map being maintained by the Washington Post (I think) about all of the fraudulent jobs created numbers being reported. The easiest way to eliminate the fraud is to eliminate the program itself.

On #1 - raise taxes? No, no, no. Issue bonds. Raising taxes is the last thing any Keynesian would advocate right now.

On #2 - I suppose. Yes, that is true insofar as neither of us believe in the prospect of perpetual depression until we regress back into the stone age. The point is the resources that are being unnecessarily destroyed.

On #3 - well as I wrote at several points above, it doesn't have to be zero interest rates for all rates. We're hitting zero or negative rates on short term government debt - and that zero lower bound is an indication of a price floor - but obviously other credit products with different risks and time horizons associated with them can hit a de facto price floor well before they hit a zero rate. As to government increasing aggregate demand - it does that (or should do that) by borrowing. People always talk about Hoover increasing government spending - the point is he increased taxes to pay for it! If government borrows to finance its stimulus it increases the demand for savings, because it competes with the private sector for those savings. As the demand for savings increases, the market clearing interest rate increases. The idea is, if you get the market clearing interest rate up the price floor is no longer binding, the market can clear, and you have no dead-weight loss from the liquidity trap anymore. At that point, fiscal stimulus should be self-neutralizing. It won't have any traction anymore because it will just add to inflationary pressures (which, I might add, reduce debt burdens wage stickiness - not entirely a bad thing).

On #4 - well, presumably their WOULD be consequences for fraud. That's why it's so great. For research purposes, it's also fantastic to know what money went where. I don't buy the "jobs created or saved" numbers either. Conceptually, I'm fine with the idea of "jobs created or saved". I don't think we can figure that out by a grantee report to the administration, though.

#1 Issuing bonds - debt that is - is raising taxes. Indeed, it is a hidden tax and it is one the primary reasons why the state can continue to fund what are unpopular wars.

#2 The point is the resources that are being unnecessarily destroyed.

Yes, they are being destroyed, by the activities of the state. Stimulus spending is highly destructive of private resources.

#3 As to government increasing aggregate demand - it does that (or should do that) by borrowing.

Government borrowing leads to war and of course to the whole host of lies we are so familiar with from state actors. Government borrowing should be outlawed; it is simply too dangerous a tool for any state to have.

#4 There are no consequences for fraud; the government has seen to that. Check it out for yourself; see if the government is actually tracking spending in any meaningful way and what may be done if someone misreports. The answer is nothing and nothing.

RE: "Government borrowing should be outlawed; it is simply too dangerous a tool for any state to have."

Then you can kiss democracy goodbye. It's a tool of the people.

No, it is not a "tool of the people." There are no "the people." Borrowing is a tool of members of government. Democracy is also extremely overrated; markets are much better.

Rule by "the people" (mob rule) was the goal of the communist manifesto. I love how lefties are all for the tyranny of the majority until it means that stuff like gay marriage is unwanted by the majority. Then, it's tyranny and how dare they. At no point do they ever understand that this is a natural consequence of democracy.

On #1 - raise taxes? No, no, no. Issue bonds. Raising taxes is the last thing any Keynesian would advocate right now.

Go back and read Liberty's post. He's telling you they are one and the same. To borrow is to tax. Raising taxes and borrowing are not two different, unrelated things.

On #2 - I suppose. Yes, that is true insofar as neither of us believe in the prospect of perpetual depression until we regress back into the stone age. The point is the resources that are being unnecessarily destroyed.

Because that's what usually happened before the Keynes' brilliance saved us in the 1930's. Every recession/depression returned us to the stone age.

They are not unrelated, but they are two different things. The bond market certainly seems to think they're two different things -that's good enough for me.

RE: "Because that's what usually happened before the Keynes' brilliance saved us in the 1930's. Every recession/depression returned us to the stone age."

I'm saying nobody here thinks that, methinks

I'd give you an explanation of why that's not really true, but I haven't the time for the mental origami of a true believer today.

I'm saying nobody here thinks that, methinks

Nope. That is the underlying assumption of keynesian stimulus. Otherwise, you'll have to give a satisfactory explanation for how exactly government wonks know how much is "necessarily" vs. "Unnecessarily" destroyed and why you persistently ignore the price of intervention.

It's very perverse that you're quoting Bastiat in support of Keynes.

I thought you guys would like that.

Bastiat's insight is pretty incontrovertible - and I'm not aware of anyone who doesn't agree that opportunity costs are important. Bastiat's proto-libertarianism has earned him a pretty select fan base that I think regularly misapplies the Broken Window Fallacy, but aside from my differences with him on political philosophy, I personally have no problem with Bastiat - certainly not with his Broken Window Fallacy, of all things.

Can you explain in a more convoluted way. Use more jargon, please. And while your at it, continue to make statements like "Bastiat's proto-libertarianism has earned him a pretty select fan base that I think regularly misapplies the Broken Window Fallacy" as if they are the simple truth. Don't explain why this is so, even though this statement is pretty lofty and seriously critical, if true.

What jargon did I use anywhere in this entire thread? What was convoluted in my explanation to Geech?

In what way is the Broken Window Fallacy misapplied? I'm sure your answer will end up defending legal plunder in some form, so I'm really more curious about your logic behind this statement.

Often people make statements about the impact that disasters or destruction will have on the production of wealth. Bastiat groupies jump on those statements, but completely miss the fact that Bastiat was talking about wealth stocks, not wealth flows.

I have no clue what that could possibly have to do with legal plunder - but ask Methinks. She could probably twist it so it does.

Thanks for pointing that out to us, danpoo. Hate those misapplications.

Dude, you're at your wonky, giddy best here.

Oh STOP, Mark. Tsk tsk tsk. Dude is simply pointing out all that deadweight loss associated with no central planning. Obviously, no deadweight loss is associated with Keynesian interventions. No unseens there. It's free lunch for EVERYONE! WEEEEEEE!!

No YOU stop, you crazy anarchist!

:)

Oh, Don't interrupt me. I'm in the middle of my free lunch right now.

The free lunch sounds stimulating. Are you having an unemployment smoothie with that [Dan's treat]?

LOL!

You and Don act like you can make pronounciations on what Keynes is or is not using this simple "spend yourself to prosperity" caricature of Keynes, without ever engaging the fact that interest rates are either at zero or (if there are risk premia and time preferences to take into account) at some other de facto price floor.

Russ recently had an episode of EconTalk where the notion of effective interest rates being at zero was refuted.

Oh that's great - do you recall which one?

I'm not sure exactly how he could refute it - at least for some rates in the last year and the mild deflation we've seen in some months. To a large extent it's not so much the zero that's important - it's the fact that it's a de facto price floor. If, given risk premia and time horizons 2% is a price floor that you can't get below so that the market clears, then that's bad too. A zero nominal rate on short-term government debt is an easy rate to visualize when we talk about a liquidity trap - but really the important thing is that it's a binding price floor of one form or another.

I would say that it is within the last six episodes.

Thanks - I'll look for it tonight

Sumner on Monetary Policy

Oh great - I remember Russ mentioning that, but I never listened to it. Sumner is always great to read. But yes - to him there's no problem the Fed can't solve, so he doesn't put much stock in the liquidity trap. Not quite the argument that Russ or someone from the Austrian School would make against it, I'm sure.

...to him there's no problem the Fed can't solve...

Thanks. Please continue to criticize our hosts' caricaturing of others' positions.

Why can there not be a negative interest rate? It seems straight forward: pay more than $100 for a bond with a $100 face value.

There have briefly been negative interest rates on some Treasuries. As I understand it, I think the New Zealand central bank has experimented with negative rates as well.

Like I said - the "zero nominal interest rate" is sort of a nice thing for people to wrap their heads around. The more important thing is sticky rates that hit a de facto price floor and leave the economy with a savings glut. Some rates are obviously never going to come close to zero. But because the market wants to preserve relative prices between that sort of debt and the debt that CAN get to a zero nominal rate, it's still a de facto price floor.

I don't think that "spend your way to prosperity" is a caricature, its just imprecise. Keynes' idea was to "redistribute your way to full employment".

He does mention the fact that in downturns the government has the ability to borrow at low rates, and therefore should, but his primary objective seemed to be to "tax and spend" (redistribution), not "borrow and spend" (exploit future generations). Also, he never really makes the case that full employment is an inherent good, he just proclaims it and moves on. That is, employment bias.

And as Sam points out below, this is just a general comment about the segment - it's directed as much to whoever edited it and whoever was asking the questions as it is to Russ and Skidelsky.

That was terrible. More like a promotional ad for Keynes, than a factual contrasting of ideas. Russ hardly got a word in, while Skidelsky got to interupt and always make his point.

Skidelsky seems to think in a vacuum. He appears to believe that "priming the pump" will be done altruistically.

Politicians have no term limits; their goal is permanent "employment".

They've cut deals to ensure their power base through legislation. FDR did it and the current administration is following suit.

The most glaring example is the phony stimulus spending.

It came off as Roberts vs. Keynes instead of Roberts vs. Skidelsky. Still, it went well. Glad to see you get some airtime.

I noted how Skidelsky's defense of Keynes was more emotional and political than economic.

These programs are highly edited, and this episode looks it.

Good segment.
But few things are more pitiful than when old folks try to get the attention of young folks by trying to act like young folks. Rap videos on Keynes and Hayek? You're only fooling yourself, if you think young people are actually going to be attracted to economics because (you think) you have managed to "disguise" it in a format that is "accessible" to young people.
As an economist you are familiar with the concept of specialization, so please stick to what your good at, economics, and leave the rap music to others.

You didn't find it stimulating? Okay; neither did the economy.

HEYYYY!!! I am an 18 year-old freshman economics major who happens to be a HUGE fan of rap music. I follow Cafe Hayek everyday, and although I don't comment on it much, I have learned very much and have, subsequently, started my own blog. I loved the rap song. Fo'sho. Mad props to you, Professor Roberts; that ish was tight, yo.
Seriously though, I loved the song and some of my nerdy econ friends who love rap music will love it too. Can I be in the video, please? I have street cred and know enough about to Hayek and Keynes to represent myself when asked about the two. You have inspired me to make a video for this. Peace, homie.

haha oh man if there could be a lil wayne/prof. roberts collaboration i would be deliriously happy.

We'll have to wait for lil' wayne to be sprung from the slammer. As the president said to the NAACP in his best ebonics: "We cain't awl be bawlahs. We cain't awl be lil wayne".

My vote is for fitty cent.

Or T-Pain.

"I'm on a boat..."

At the end you finally made the point that the stimulus might actually increase uncertainty. Unfortunately, they didn't give you time to expand on it.

Then they closed with [paraphrasing], "Skidelsky believes that Keynes theory of spending DOES stimulate confidence."

No doubt it does stimulate something, something the politicians want. The politicians want electric cars, a little wave of the magic stimulus wand and wahlah, the market starts developing electric cars. Unfortunately, the Keynesian's will always have that to point to. There's no good measure of how much people actually value these things which are produced. It all gets added together whether it creates wealth or not and the Keynesian's check off a win.

And, no doubt, there will be winners and the Keynesian's will be sure to point them out. All the while ignoring the losers.