Sunday, May 5, 2013

Misunderstanding Keynes, Famous Economist Edition

John Maynard Keynes
This is also another edition of Ferguson v. KrugTron, albeit indirect in two ways. First, the most recent clash was not a case of either Niall Ferguson or Paul Krugman (KrugTron's human form) attacking each other, and, second, John Maynard Keynes was again the foil, or in Ferguson's case the petard upon which he hoisted himself.

The linchpin is Keynes' famous quote, "In the long run we are all dead," which on the face of it is witty in and of itself. I've always taken it to mean that at some point long-range planning has to include the eventuality that in the long run, WE ARE ALL DEAD, which, hopefully, would lead at least some of us to engage in short- to medium-term actions.

Niall Ferguson
That's only if you take the quote out of context and simply make a stab at what Keynes was trying to say. Niall Ferguson went further, and that's where he got into some trouble. Daniel Politi in Slate:
Ferguson was speaking at an investment conference in California on Thursday when he was asked about Keynes' famous observation that “in the long run we are all dead.” Ferguson disagrees with that idea because “in the long run our children, grandchildren and great-grandchildren are alive, and will have to deal with the consequences of our economic actions,” he said in his statement. But during the presentation, he went further.
Financial Advisor’s Tom Kostigen paraphrased Ferguson’s reply at the conference:
Ferguson asked the audience how many children Keynes had.  He explained that Keynes had none because he was a homosexual and was married to a ballerina, with whom he likely talked of "poetry" rather than procreated. The audience went quiet at the remark. Some attendees later said they found the remarks offensive.
Ferguson then went on to say that “it's only logical that Keynes would take this selfish world view because he was an ‘effete’ member of society,” according to Kostigen’s account.
Paul Krugman
Enter Paul Krugman, who flagged Ferguson's gaffe in his blog post, "The Gods Themselves Contend in Vain." Look to the "Please tell me this report is false" link for the news of Ferguson's off-putting remarks. Then Krugman links to Ferguson's almost immediate, unqualified apology.

Krugman, being the teacher that he is, the next day took the opportunity to remind people that the full text of the famous Keynes quote shows that he meant to make a completely different point. First, the quote in context:
But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.
Keynes was chiding his own profession to actually say something, build a model that calls for solving current problems and not simply slip away by saying "tax cuts will trickle down and save us all" or "fiscal consolidation will eventually solve all our growth problems." Sez the professor:
As I’ve written before, Keynes’s point here is that economic models are incomplete, suspect, and not much use if they can’t explain what happens year to year, but can only tell you where things will supposedly end up after a lot of time has passed. It’s an appeal for better analysis, not for ignoring the future; and anyone who tries to make it into some kind of moral indictment of Keynesian thought has forfeited any right to be taken seriously.
[...] And look, this isn’t hard. The overwhelming fact about our current situation is that conventional monetary policy is played out, with short-run interest rates at zero. This means that there is no easy way to offset the contractionary effects of fiscal austerity (maybe there are exotic ways to do something, but they’re tricky and unproved). And this in turn means that austerity right now is a terrible idea: any fiscal savings come at the expense of reduced output and higher unemployment. Indeed, even the fiscal savings are likely to be small and maybe even nonexistent: lower output and employment reduces revenues, and may inflict long-run economic damage that actually worsens the long-run fiscal position.
I'm not an economist or a mathematician, but it's not hard for me to see that cutting spending in a recession reduces government revenues because my spending is your income and vice versa, as Krugman often points out. If my spending goes down, your income goes down, and GDP suffers, tax receipts shrink, etc.

On the other hand, I see how spending of any kind during a downturn, whether private or not, drives up GDP and tax receipts, etc. Now, I can also see how, without gargantuan multipliers debt will grow long-term and eventually surpass the added tax receipts. Government spending is often efficient but not that efficient.

The point, in the end, is that the fiscal hawks want to stop spending now, now, now and thus inflict pain now, now, now. Yet, if we spend now -- on infrastructure, education, research, yada yada yada -- the pain is softened. We are left, of course, to find long-term ways of paying down the increased debt, and we have an obligation to do so before we are all dead.

I think that's at least an approximation of Keynes, and I believe in it. It suits me better than, say, kicking the poor and elderly early and often because oh my god Greece!

KrugTron the Magnificent: Right once again.

No comments:

Post a Comment