Paul Krugman - The Third Depression

[IndependentlyPoor]

No. As in my previous example/analogy - there may be external forces that outweigh what you are looking at.

It may or may not be the case in your example, but it doesn't prove/disprove anything, unless we can fully quantify the external effects - and we probably can't.

-ERD50

I'm trying to figure out what you are disagreeing with. I said

It turned out that raising taxes and cutting spending (or if you prefer, reducing planned increases) did not prevent the economy from growing nicely.

Is this not true?

Then I said

Seems to me that actually goes against Keynes' theory

Here I am acknowledging that other things were going on. Everything else equal, Keynes would have predicted a slowdown. I don't see any disagreement here either.

The economy boomed despite Keynes. The budget was in such good shape that Greenspan publicly worried about a surplus.
Earlier I credited this happy state of affairs to the Greenspan/Clinton policy. Is what you disagree with?

If so, no problem, but it has nothing to do with Keynes being right or wrong.

However, to require that I

fully quantify the external effects

is demanding the impossible. Can any economic argument reach this standard?

 

[ERD50]

I'm trying to figure out what you are disagreeing with. ...

The economy boomed despite Keynes. ...

Earlier I credited this happy state of affairs to the Greenspan/Clinton policy. Is what you disagree with?

I'm disagreeing that a conclusion, any conclusion, can be made based on the information at hand.

What we have is:

A: A policy was put (or NOT put) in place.
B: The economy boomed (or tanked).

That is not enough to assign cause/effect.

Everything else equal, Keynes would have predicted a slowdown. I don't see any disagreement here either.

And for all we know, this did cause a 'relative slowdown', which I would think (but don't know) is what Keynes would have predicted. I doubt he deals in absolutes.

However, to require that I fully quantify the external effects is demanding the impossible. Can any economic argument reach this standard?

That's what makes real world economics tough. Need another example of absolutes versus relative? Here:

Let's say I understand chemistry and biology, and I can determine that X # of nitrogen should boost yield on your corn crop by 10%. I also do some carefully controlled test plots and am able to validate these numbers pretty closely.

Now you, the farmer, buy my fertilizer this year, but your corn crop gets wiped out by hail. Your yield goes down by 50%.

Does this "prove" that my fertilizer is no good? Of course not. The effects of nitrogen on corn are well understood, and we can estimate that the crop still did relatively better, or at least would have under more typical circumstances. But we can't always count on absolute improvements, due to external events.

This is complicated far more by real world economics.

-ERD50

 

[Gone4Good]

The budget was never balanced during President Clinton's term. I'm surprised folks are still saying this. The national debt went up every year.

This is only true if you care about the semantics of when Clinton's term ended. The largest surpluses occurred in 2000, before the tax cuts, before the recession, and before Bush's first budget. National debt (according to the link) declined from $5.79T to $5.63T during that year.

There is no doubt that the budget moved from deficit to surplus, even considering the accumulation of "debt" to social security recipients who won't get paid what is currently promised.

 

[Gone4Good]

How much growth was created or saved because of them and how much worse would have the problem been without them? If you accept that there were jobs created or saved from the 'stimulus' money then the concept is the same for the tax cuts. The concept 'cuts' both ways.

Except when you're in a liquidity trap where people and corporations horde money (emphasis added).

Current economic conditions matter to proposed policy recommendations (it's strange that no one seems to acknowledge this seemingly obvious point). Demand side stimulus doesn't work when the economy is up against supply constraints (1970's) and Supply side policies don't work when you're stuck in a liquidity trap with the Fed constrained by the zero bound (like now).

One size does not fit all.

 

[IndependentlyPoor]

What we have is:

A: A policy was put (or NOT put) in place.
B: The economy boomed (or tanked).

That is not enough to assign cause/effect.

-ERD50

No.

What we have is:
A: A policy was put in place (measures to balance the budget).
B: It succeeded (or came close depending on whose numbers you look at).
C: That the economy boomed is an entirely separate issue.

The point was that the government is capable of counter-cyclic economic policy (tax increases and spending constraints). The fact that these measures did not prevent the economy from booming is icing on the cake. Whether through luck or skill, they hit the jackpot and got it just right. (I admit to a bit of snark in that last sentence. I suspect that many would say that taxes were too high.)

 

[ERD50]

No.

What we have is:
A: A policy was put in place (measures to balance the budget).
B: It succeeded (or came close depending on who numbers you look at).
C: That the economy boomed is an entirely separate issue.

OK, I think we are in agreement then, as far as that goes. That's not was I reading from (into?) your posts.

-ERD50

 

[IndependentlyPoor]

OK, I think we are in agreement then, as far as that goes. That's not was I reading from (into?) your posts.

-ERD50

Perhaps my posts are not the model of clarity that I imagine them to be.

 

[Gone4Good]

John Makin is a conservative economist (you can see him blame the economic crisis on the government in a 2009 WSJ Op Ed piece) but now seems to have come to the same conclusions as Krugman.

The Rising Threat of Deflation

This article for the American Enterprise Institute is a pretty good discussion of our current situation, and a pretty good recital of text-book economics.

There is a lot of stuff here worthy of quoting, but I'll just leave with his conclusion:

At this point in the postbubble transition to deflation, fiscal rectitude and monetary stringency are a dangerous policy combination, as appealing as they may be to the virtuous instincts of policymakers faced with a surfeit of sovereign debt. . . . . The G20's shift toward rapid, global fiscal consolidation--a halving of deficits by 2013--threatens a public sector, Keynesian "paradox of thrift" whereby because all governments are simultaneously tightening fiscal policy, growth is cut so much that revenues collapse and budget deficits actually rise. The underlying hope or expectation that easier money, a weaker currency, and higher exports can somehow compensate for the negative impact on growth from rapid, global fiscal consolidation cannot be realized everywhere at once. The combination of tighter fiscal policy, easy money, and a weaker currency, which can work for a small open economy, cannot work for the global economy.