[The Obama stimulus and budget plans have ignited an intense debate between 'liberal' and 'conservative' economists, and in typical fashion, these arguments are obscuring the social and political values at their core. However, they are still vital to the health of our political economy and society, and in that vein, The Economist is hosting an online debate between Berkeley economist Brad DeLong and Chicago economist Luigi Zingales, regarding DeLong's proposition that 'we should all be Keynesians now'. In this blog post, we summarize their arguments, offer our take, and provide some alternate perspectives. The essential point we want to make is that despite the quantitative clothing of economics, this particular debate has been an essential feature of every human political economy that has ever existed, including family units, and it arises from competing beliefs and values (or in the case of an organization or family, between competing needs and wants). A healthy system is one that manages to keep these values in balance over time, as our system has done in the past, and will, we believe and hope, continue to do in the future.]
Interesting online debate being hosted by The Economist, on Brad DeLong’s proposition, paraphrasing Milton Friedman circa 1965, that we are all Keynesians now, or more precisely, that we all should be.
A word to the wise – policy disagreements among economists tend to be veiled disputes over social values. What you’ll read is a debate between representatives of ‘liberal’ Berkeley and ‘conservative’ (U. of) Chicago economics, where there are many points of theoretical and empirical agreement, but nearly intractable differences between what kinds of policies each side finds attractive. For example, DeLong admits the possibility of a primary objection to ‘Keynesian stimulus’:
Could it happen that as the government starts its spending that the spending is, in Fama’s words, “funded by issuing more government debt … The added debt absorbs savings that would otherwise go to private investment … and just moves resources from one use [private investment] to another [government purchases]“? Yes, it can happen. When government deficit spending triggers a sharp rise in interest rates, that rise in interest rates will discourage and crowd out private investment spending.
He then points out – correctly, we think – that interest rates are not currently behaving in a way that indicates that the federal government is ‘crowding out’ private investment to any degree. In other words, there is a lot of ‘slack’ in the economy (meaning underutilized resources), and government can be the risk taker of last resort that steps into the breech in that situation, directing or incentivizing investment (for example, as in the Obama stimulus and budget, in health care technology, infrastructure, and ‘green’ energy technologies), distributing more claims on goods and services (monetary and/or vouchers, such as payroll tax holidays, unemployment insurance, and food stamps), and making direct demands for goods and services, including the hiring of unemployed labor.
Opponent Luigi Zingales also admits to a general point of agreement between schools of thought: “I am not disputing the idea that some government intervention can alleviate the current economic conditions, I am disputing that a Keynesian economic policy can do it.” He supports the latter assertion by first pointing out that the meaning of ‘Keynesian’ is somewhat nebulous, and then arguing that all but one of the four possibilities he sets up are false:
- Professional research does not indicate widespread support for the effectiveness of fiscal expansion as a counter recessionary measure.
- Few economists “would dare to say that the current US economic crisis has been caused by underconsumption.” He also argues that ‘Keynesian’ thinking contributed to the crisis in large part by ignoring the effect of incentives on behavior.
- Based on his second argument, he claims that the solution is unlikely to be found in the same kind of thinking that caused the problem.
- The respect in which DeLong’s proposition is true is in the widespread belief in and practice of Keynesian economic principles: “Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behaviour. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good.”
In my experience, heavy reliance on analogy, as exhibited in argument four, is usually a good sign that a disagreement is based upon competing social and political values, and not a purely empirical, weight-of-the-evidence approach.
Zingales’ second argument is also worth a closer look, specifically his claim that “Keynes studied the relation between macroeconomic aggregates, without any consideration for the underlying incentives that lead to the formation of these aggregates.” That statement is too strong. While well developed theories of incentives and behavior were not available in Keynes’ time, they were most certainly at work in the background of his General Theory and some earlier writings (in GT, he typically referred to them as psychology). Tempering Zingales’ assertion, it wouldn’t be unreasonable to argue that neo-Keynesians and other liberal economists (and Keynes himself in the GT) tend to subsume a focus on incentives to interventions aimed at directly manipulating some outcome(s) of interest, while neo-classicals and other conservative economists tend to make incentives primary, and then either accept the aggregate ‘wisdom’ embedded in market and economic outcomes, or less commonly, motivate economic agents to pursue some desired outcome.
In both of those approaches, moral principles are clearly at work. On the liberal side, it’s “sharing the wealth” in good times, and limiting the damage in bad times. On the conservative side, it’s a desire to maximize voluntarism over compulsion, and minimize the involvement of political authorities in economic decisions and activity. Said another way, the former makes equitable distribution of the economic pie the primary policy objective, while the latter makes the long term size of the pie the primary objective. These competing objectives are as old as human beings, and perhaps even older, judging by some primate research.*** One of the primary functions of political processes is to strike a balance between the two, and it should be obvious that, despite the fact that economists too often shroud the debate in models, numbers, and forecasts, it’s important to the health of our political economy and society that these debates occur. Kudos to The Economist for providing a public setting for one of them.
Our take? Both schools have a lot to offer (and sycophants of both tend to waste far too much time and effort disparaging the idols and ideas of the other). Two people that we’d introduce to the debate are Bruce Bartlett and Robert Mundell.
Bartlett has penned two good syntheses for Forbes this year, one of which illuminates more productive and important questions for debate, such as the uncertainty governments often create when altering “rules of the game”, which can amplify business cycles and cause downturns to persist longer than they might otherwise, and the other on whether government spending was too high or too low during the 1930s. Bartlett also provided a sober assessment of conservative mythology around taxes and growth recently; despite losing many friends on the right, beginning with his public criticisms of G.W. Bush policies. He remains, in our view, one of the most critically honest – and thus insightful – conservative analysts, and his work reminds us that in the political domain, we all need to become more comfortable hearing and thinking through ideas and evidence that we reflexively don’t like.
Stepping off of our soap box, we’d also point once again to Chicago School icon Robert Mundell’s characterization of Keynesian economics in 1971 as being borne out of a world of closed economies with pessimistic expectations, and not widely applicable to an integrated and growing global economy. To us, that leaves room for both ‘liberal’ and ‘conservative’ economic policies, depending upon where we are in cyclical and secular business cycles, and what the current “rules of the game” happen to be. Today, dampening the downside of a historically rare global recession or contraction, and financing it from future tax revenues, might be the preferable alternative. And as we opined recently, while the Obama stimulus and budget plans might not be as powerful as their architects and proponents believe – and while they might put the cart alongside if not in front of the horse in some important respects – they are also unlikely to be as disastrous as many opposing pundits and policymakers have claimed. We still believe that tax reform is one of our most pressing policy challenges, and that it’s still being pushed to the back burner, if not off the stove entirely. But we don’t think that Obamanomics will turn out to be the destructive gale force that some fear.
***Consider, for example, the archetypical case of a successful hunter returning to their band, while some members are facing the prospect of going hungry. How much should be shared with whom? What individual(s) has authority to make the decision? How should the hunter be compensated for his efforts and/or sacrifice, if at all? It’s hypothesized by some observers that chimpanzees in the wild wrestle with similar challenges, to such an extent that ritualized behaviors have evolved around the sharing of meat. These examples illuminate the importance of Zingales’ point about incentives – how do you best incentivize the successful hunter to continue producing and to willingly share a reasonable proportion of their catch? How deeply is “respect” for the productive member of a society embedded in us? The contrasts between human and chimp societies raise some important questions as well, eg, in a political system as large as our national one, how do you incentivize productive “donors” to willingly provide a portion of the fruits of their labor to bureaucrats to be distributed to anonymous “nonkin” recipients? And just how severe is the agency risk at work in the redistribution of resouces, in light of evidence that resource sharing among chimps appears to be primarily motivated by the desire to build and strengthen social networks? In other words, if we bump government into the role of the successful hunter, government beneficiaries into the role of the successful hunter’s network, and the taxpayer into the role of the dead juvenile baboon or other prey, the situation starts to look far less equitable for whoever’s footing the government’s bill! Our system, as imperfect as it is, was thankfully designed with these risks in mind.