Gloriousness

Over at Hopi Sen\’s we have an example of economic gloriousness. From Left Outside.

“If they instead put it up to say 7k with promises of increases in future years, then the measures that they’ve announced balance.”

Of course if they do that, it may still impact on current spending in the economy. If people are confident of a further tax cut in a years time then they’ll be a little freer with the purse strings now, boosting demand and hopefully boosting growth, making the cut more affordable. Best case scenario, but could happen i suppose.

Ahahahahaha, snigger.

That’s Ricardian Equivalence. And if you believe in Ricardian Equivalence then you don’t believe that fiscal expansion can ever work. For if we borrow to spend now then everyone notes that taxes will have to rise in future to pay for the borrowing and thus the spending of that borrowing has no effect as everyone saves it.

If people spend now in anticipation of tax cuts then they’ll save now in anticipation of tax rises….meaning that you’ve just entirely disproved the central assertion of Keynesian economics.

Well done!

8 comments on “Gloriousness

  1. “And if you believe in Ricardian Equivalence then you don’t believe that fiscal expansion can ever work”

    unless you believe that when used, say, in a liquidity trap, fiscal expansion can raise the path of economic activity, relative to the no-fiscal expansion alternative, and hence mean that future tax rises, relative to the no-fiscal-expansion alternative, won’t be necessary, meaning you don’t have to save in preparation for them. In which case fiscal expansion works in a world of Ricardian equivalence, rational expectations etc.

    (I think)

    if you wish to update your beliefs, try reading this or this

    I don’t know why you seem to have dedicated yourself to mocking, or trying to “disprove” Keynesian policy responses, you are allowed to cling on to your free market principles and still acknowledge that when the economy hits the skids a bit of government borrow-and-spend can be useful.

    Tim adds: “acknowledge that when the economy hits the skids a bit of government borrow-and-spend can be useful.”

    But I do acknowledge this: I do not think that Ricardian Equivalence holds. I’m just pointing out that if it does, as is alleged by Left Outside, then borrow and spend does not in fact work. This is not an explanation of my beliefs you have above. It is an explanation of the consequences of someone else’s beliefs. It is not possible to both hold RE and borrow and spend as being true. One contradicts the other.

    My actual belief about Keynesian demand management is that it founders upon three rocks. The first, which really only applies to the “fine tuning” bit, not the “Oh my God spend or we’ll have a Depression” bit, is the economic calculation problem. It’s simply not possible to get sufficient information in real time to be able to take the necessary decisions in an informed manner.

    The second is that I am pretty much convinced that everyone’s being a General in the last war. For example, we have very little undifferentiated labour in the current economy…in wild contrast to the 1930s for example. Thus splurge and spend really doesn’t have quite the same effect on putting undifferentiated labour to work. The rise and rise of the division of labour has changed matters. This also applies to perhaps the New Keynesians with their concentration upon menu costs. Computerisation has made all of this very much simpler, perhaps moving us from the New Keynesian scenario (which might well have been true in the 80s when first derived) closer to the New Classicals perhaps. For example, we are seeing different behaviours with wage changes now than we did in past recessions. But this second rock is, I agree, somewhat conceptual and only an opinion.

    The third is I think the rock on which the ship is really broken. Politics. Go back three, four, six years, into say Polly’s archives. We were at the top of a boom. Proper Keynesianism would have been to apply fiscal contraction at that point. To run a primary surplus and to be paying down debt. But is that what the political impetus was? Most certainly it wasn’t. There were impassioned cries that this needed fixing, that given the rivers of gold flowing into the Treasury that that, the other and my pet project should all be funded and kittens would therefore become cuter.

    That’s the problem….not that deficit spending doesn’t work (even if less than before perhaps) but that the necessary budget surpluses and fiscal contractions never seem to happen. Thus, rather than the necessary cycle we have a ratchet…..not what Keynes was on about at all.

  2. “when the economy hits the skids a bit of government borrow-and-spend can be useful”: but didn’t Keynes assume that thegovernment would have done a bit of pay-back-and-save in the good years? You know, like wot the Bible says?

  3. dearime,

    yeah, sure. But as far as I know, starting from a position of fiscal surplus isn’t a necessary condition … I don’t know at what point the level of debt starts to work against things.

  4. Tim,

    those are sensible points – I wrote but deleted something (too long winded) about how Keynesian stimulus might not work very well, some of which you have covered. Your idea about differentiated labour is interesting … and of course the problem of the politics isn’t going away (actually, there’s a lot of people talking about fiscal authorities with a mandate to follow rules, I’ve been meaning to write about)

    However, I still think you are wrong on your main point, as I hoped the argument in my first comment and links would make clear

    I’m just pointing out that if it does, as is alleged by Left Outside, then borrow and spend does not in fact work…. It is not possible to both hold RE and borrow and spend as being true. One contradicts the other.

    I think that’s wrong, and a fuller explanation, if those given in the links above doesn’t satisfy you, would probably require me locating some papers/models that have RE and “borrow and spend” working.

    Tim adds: Don’t worry, I’m well aware that you can construct models where both hold. If you apply a weak form of RE and then add in time inconsitencies for example. Or if only some people recognise the future taxation and react, or if all do but only a bit. But if you hold both as being absolutely true they are contradictory.

    Which is what led to the snark of course…..

  5. ah, well now I think you’re being unfair to LO, who didn’t say anything about ‘full’ RE. Also, I think you can have full ‘RE’ and still have tax and spend work, so long as you make other assumptions about the situation (like bringing idle resources into use, perhaps preventing some capital depreciation, and knocking econ onto higher path, as in my first comment)

    although I quite understand your point that lefties shouldn’t talk about RE in one direction (helpful) if they don’t talk about it in the other (unhelpful).

  6. Pingback: Democracy and the BA Strike « Left Outside

  7. Of course if they do that, it may still impact on current spending in the economy.

    I was testing a theory out, worth thinking on isn’t it? Sneering at me is a little rude from someone who (like me) at best claims to be an interested amateur. In any case, I’m off to LSE in October to do the Master’s Giles Wilkes did so I’ll be trying to sharpen up 😉

    Writing this I was thinking along the lines of Friedman’s permanent income hypothesis.

    There is another difference between this sort of RE and the sort recommended by Keynes. A lot of people in this country are very poor, their spending decisions are not really made with an eye on future taxes because they have both eyes firmly set on making sure there’s no month left at the end of the money. These people could be convinced to spend more now if there’s a prospect of a little more jam in a few months or years, but they couldn’t save any more now even if faced with less jam in the future. I’m not sure how big an effect this group would have, but it’s probably an important one this tax is aimed at.

    I do think the state can have a role in demand management, but I also see where you’re coming from a la Public Choice economics and the difficulty of paying down debt in the good times. Fair weather Keynesians are probably a little like the “Libertarians” who are in fact rich white male conservatives that give classical liberals like yourself a bad name. Annoying, and while they look like good allies they’re probably anything but. Associated with Polly Toynbee I do not want to be.

    Trust me, I do aspire to consistency and that’s why this snark is particularly interesting and I suppose useful.

    What do you think of Scott Sumner by the way and his nominal GDP-targeting stuff? I’m beginning to think monetary policy is something that I know far too little about.

    Anyway, I see Luis Enrique (get a blog! you’ve got a good name and interesting thoughts, perfect) has done a lot of the leg work for me, including linking to the WCI.

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