Krugman, invasions by aliens, Keynes and hole digging.

Anti-Keynsians have been putting their foot in it big time recently by taking Keynes’s parable about pointless hole digging seriously.

Keynes made the point that the multiplier works even if the form of spending that sparks of a “mulitiplier episode” is pointless, like having people dig holes and fill them up again all day. At the same time he made it perfectly clear (for the benefit of the humourless) that he did not actully favour pointless hole digging.

Krugman, making the same point, gave as an example, spending money on defending the world from an invasion by aliens from outer space: an invasion which in the even turns out to be a false alarm.

Unfortunately a number of less than sophisticated folk have taken Keynes’s hole digging and Krugman’s hypothetical alien invasion seriously.


Two examples of these humourless economists are thus.

1. Wall Street Journal Op Ed article (para starting “The authors are careful….”).

2. The Cobden Centre

The moral is: keep humour, irony and words with more than two syllables out of debates on economics, else those simpletons will get the wrong end of the stick.

Actually economics is so complicated that it’s VERY GOOD IDEA to keep humour and all unnecessary words and syllables out of it.

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The economically illiterate Tim Geithner now wants stimulus!

The main headline in today’s Financial Times is that Geithner is calling for stimulus. Would this by any chance the same Tim Geithner who earlier on in the recession was a staunch OPPONENT of stimulus? The same Tim Geithner who is part responsible for the unemployment and poverty being experienced by millions of Americans?

If I was Tim Geithner I’d have died of shame by now. But then in the West’s elite don’t know the meaning of the word shame.

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Obama’s employment subsidy: not much use.

The idea that employers should be rewarded in proportion to the number of new or additional employees they take on is as old as the stars. The idea is a waste of time given very high levels of unemployment because a straight rise in demand is simpler and just as effective.

As to lower or “NAIRU” unemployment levels, the idea works for a short time. That is, it reduces NAIRU for a short while, perhaps up to a year or so, but loses its effect thereafter.

Conclusion: the idea is not much use. For a detailed analysis of the idea, see here.




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This is the best economics article for months.

This article by Simon Jenkins in The Guardian is brilliant.

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Congratulations to the Swiss for printing lots of money.

Faced with a sharply appreciating Swiss Franc, the Swiss are at last reacting in a logical way: printing Swiss Francs in whatever volume is required for those who want to hold them. This will NOT be inflationary because the demand for these additional Francs is a demand to HOLD Francs, not spend them. As David Hume pointed out in his essay “On Money” two hundred years ago, additions to the money supply are not inflationary until and to the extent that the additional money is actually spent.

Hopefully the rest of the world will tumble to the latter point before we get too far into a Japanese lost decade. That is, weak demand in the US stems from a desire by the private sector to hoard or hold more money than is usual (in addition to the effect of deleveraging).

The solution to the latter problem is to print money and spend it (and/or cut taxes). And if inflation looks like getting excessive, do the opposite: raise taxes and rein in money and “unprint” this money.

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Bruce Bartlett opposes a payroll tax reduction.

As Dean Baker put it “In elite Washington circles ignorance is a credential.” This seems to be particularly true of “elite members of the elite”: former presidential advisors, e.g. Martin Feldstein and Bruce Bartlett.

Bartlett in a New York Times article tries to argue against a payroll tax reduction, and gives some hopeless arguments to back his case. Plus a payroll tax reduction is one of the main measures advocated by adherents to Modern Monetary Theory, Warren Mosler in particular. So this is an additional reason for looking at the alleged weaknesses in payroll tax reductions put by Bartlett. Bartlett’s first argument is thus (in italics).

First, the tax cut only helps those with jobs. While many have low wages and undoubtedly are spending all their additional cash flow, those with the greatest need and most likely to spend any additional income are the unemployed.

Well obviously a payroll tax reduction doesn’t help EVERYONE: for example pensioners are not assisted by this tax reduction. A mentally retarded six year old can think of groups not assisted by a payroll tax reduction. But the important point about a payroll tax reduction is that it channels money into the pockets of a VERY LARGE group of the sort of people who are likely to spend a fair proportion of any increased income, that is, middle and lower income groups.

Having done that, if a government wants to assist the groups NOT ASSISTED by a payroll tax reduction (e.g. pensioners), then so much the better.

Perhaps Bruce Bartlett prefers the main stimulatory measures taken to date: QE and giving billions to banksters. The latter two measures shovel VAST amounts of money into the pockets of a MINUTE portion of the population. And not only that, but the recipients of the money include the wealthiest people in the country – exactly what Bartlett argues against! God first makes mad those he wishes to destroy.

Bartlett’s second and third reasons are that the payroll tax reduction will simply be saved by employees rather than spent. He does not cite any evidence to back this point. Well I can cite evidence. The evidence is that (surprise, surprise) peoples’ weekly expenditure varies with their income!

Of course, and equally obviously, A PROPORTION of any increased income will be saved. That is entirely predictable. For actual studies of household reactions to changes in income (temporary and permanent) see:

http://onlinelibrary.wiley.com/doi/10.1111/j.1745-6606.1984.tb00322.x/abstract
http://www.nber.org/digest/mar09/w14753.html

http://www.kellogg.northwestern.edu/faculty/parker/htm/research/johnsonparkersouleles2005.pdf

http://finance.wharton.upenn.edu/~rlwctr/papers/0801.pdf

http://ideas.repec.org/p/kud/kuiedp/9611.html

Bartlett’s reason No. 4 is that cutting the cost of employees will not work in that labour costs are nowhere near as big a problem for employers as lack of demand or lack of sales. At last: a half intelligent point. A significant proportion of the elite in the US and Europe have not tumbled to the blindingly obvious point that sales create jobs. But at least Bartlett has. So congratulations are in order there.

Bartlett’s fifth and final reason is that the payroll tax finances benefits of one sort or another, thus a reduced payroll tax will induce employees to save in order to compensate for the loss of those benefits.

The first flaw in that argument is that it fails to distinguish between saving in the form of accumulating cash, and in contrast, saving in the form of storing up other assets, like a house, qualification, etc.

When people save for pensions, a significant portion of the saving is not just plonked in deposit accounts and left there, which WOULD be deflationary. The latter effect is what Keynes called the “paradox of thrift”. What actually happens is that a significant portion is invested in real assets: office blocks, factories, etc.. And the effect of the latter saving is stimulatory.

Moreover, even if for some strange reason it was impossible to invest peoples’ savings in office blocks, factories, etc it is highly unlikely that employees would allocate ALL their increased cash holdings to boosting their bank deposit accounts. That is, it is EXTREMELY unusual where a cause has two possible effects for just one of the effects to be in evidence.

Take the above mentioned evidence as to what households do with increased income. It is POSSIBLE they’d spend it ALL, and save none of it. But the evidence is that they do a bit of both.

Or again, suppose the price of apples rises. One extreme possibility is that consumers react by buying exactly the same volume of apples and ignore the price increase. The second extreme possibility is that they spend EXACTLY THE SAME amount as before on apples, and do all the adjustment via cutting the volume of apples purchased. But the latter is a highly unusual effect. What nearly always happens when consumers face a price increase for a particular commodity is a compromise between the above two extremes.

Conclusion: nine out of ten to MMT and one out of ten to Bruce Bartlett.




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Andrew Sentance and the confidence fairy.

The so called “confidence fairy” is a term used for the most part by advocates of Modern Monetary Theory (MMTers) to describe a popular but largely mythical obstruction to economic growth. This is the extent to which business confidence in government finances impinges on economic growth.

So far as I can see from actual surveys of business opinion, this confidence or lack of it is near irrelevant compared to other problems which entrepreurs face or think they face, e.g. lack of orders, shortage of skilled labour, taxes, etc etc. E.g. see page 18 here.

This survey gives entrepreneurs main problems as being, first, poor sales, and second, taxes.

See also page 26 here.

This gives excess regulation, tax and lack of demand as the main problems.

The URL of a third survey giving similar results is thus:

http://www.blumshapiro.com/pub/articles/BlumShapiroCBIASurvey.pdf

But the latter was unavailable when I put this post online. Might be a temporary problem.

But empirical evidence, the truth, reality and so forth, are of no great concern to a large portion of the human race, in particular those who believe in fairies, unicorns, astrology etc. Andrew Sentence in an article in today’s Wall Street Journal appears to be a firm believer in unicorns – sorry I meant the confidence fairy. He cites no evidence to back his claim: presumably this is because the evidence does not exist. For some strange reason, Andrew Sentence was a member of the Bank of England’s Monetary Policy Committee.

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Afterthought, 4th Sept: Just noticed Brad de Long making a similar point.







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