Friday, March 8, 2013

The Legacy of Keynes

Jeff Sachs writing with "Morning Joe" Scarborough in WAPO argues that we do have a deficit problem and that the Obama administration's red ink has gone for naught. Of course, arguing to the contrary is Paul Krugman, seconded by, among others, Robert Reich. So what's a person to do? 

It seems to me that Keynes and later disciples like Krugman (and Sachs?) are right that fiscal stimulus, with appropriate monetary policy, is appropriate when we enter into a deep recession or depression. The economic system gets out of whack (the boom and the bust), and we have to jump start it with an infusion of cash via debt. The problem with this, Sachs (surely the senior partner in this article) identifies is that this is powerful medicine, addictive, and that we've already had too much of it. 

My take: I think that the stimulus package of 2009, imperfect as it surely was, was crucial as an "I'm more like FDR than Herbert Hoover" statement by Obama. (I don't like piling on Hoover, but I think you should know what I mean.) We needed to do something, and while something can be worse than nothing (and often is), sometimes the placebo effect in public policy kicks in. It is about the "animal spirits" (Keynes). 

However,  we know that politicians like to spend money, give everyone a job, and keep the voters in material prosperity. None of this bad per se, of course, but it does create a tremendous temptation to over prescribe the medicine of government spending to "boost the economy and create jobs". Thus, I think Sachs is right that in principle we should be using Keynesian pump priming only in limited cases, but instead we're using it excessively over decades. Think of all those Reagan and W. Bush deficits. We using too much of our "fuel" priming the pump, leaving too little available when we need it in the future; or we might say that it's like overuse of an antibiotic: used carelessly and excessively, it loses its effectiveness. My understanding of the incentives to deficit spend under "normal" circumstances comes to me from public choice economics (e.g., the recently deceased James Buchanan). I think that while Keynes and his progeny were correct in their assessment, its too potent a medicine to leave in hands of children or elected officials.

So sometimes we have to take the medicine, but usually, unless we're really bad off, we shouldn't, we should suffer through our colds and sniffles. And what should we do now? I'm not sure, but the meat ax of the sequester strikes me as a really stupid way to go. We do have government waste, but we do have programs that should be fully funded or increased. Each program should be judged on its own merits. And then again, pigs should fly. I'm going to fudge between the economic big boys and say a slow decrease in deficit spending should ensue along with an increase in taxes (yes, even for us "poor folk" earning less than $200 K; the effectiveness of taxes is more important than their absolute level to me). 

There, you have it. Of course, for a more fun consideration of these issues, go to Econ Stories and their two programs on "Fear the Boom and the Bust" and "The Fight of the Century". Terrific fun.  

Update 3/10/13: This important consideration between progressive Krugman and Sachs gets joined further by this explicit comparison by Sachs. Sachs argues for longer-term view that emphasizes long-term investment and structural changes. He doubts the value of stimulus debt. He refers to Krugman as practicing "crude Keynesianism". Krugman replies here, taking a shot at Sachs for serving as Joe Scarborough's "wingman". Sachs's article is the more carefully considered. In the long view, as more stimulus isn't in the offing, if for no other reason than the Republican ideology, we should be concentrating on the Sachs path. On the other hand, Krugman is certainly correct that we shouldn't be going all austerity, budget-slashing either. We don't want to be Britain or Europe. This is a fight between progressives and economic heavyweights. It's okay and worthwhile if it doesn't distract progressives from getting behind a sound agenda. 

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