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Home Publications Blogs Beat the Press Tyler Cowan's Keynes Versus the One We All Know and Love

Tyler Cowan's Keynes Versus the One We All Know and Love

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Sunday, 03 February 2013 08:42

Tyler Cowan argues in his column today that we should let the sequester cuts go into effect but his argument is a bit hard to follow. He tells readers:

"One common argument against letting this process run its course is a Keynesian claim — namely, that cuts or slowdowns in government spending can throw an economy into recession by lowering total demand for goods and services. Nonetheless, spending cuts of the right kind can help an economy."

He then goes on to point out that we can have cuts in military spending, farm subsidies and other areas that could benefit the economy.

This is where the story gets confusing. If we are looking to Keynes then the argument is straightforward, if we make cuts to the budget in a period of high unemployment like the present, then we are throwing more people out of work. These people will not be re-employed elsewhere, or if they are, they will be displacing other workers. (Btw, it's not clear why the word "recession" appears in the paragraph. The point is simply that we would have slower growth and fewer jobs, there is no magic recession threshold in any Keynesian text I have seen.)

This Keynesian argument that cuts leads to unemployment in a depressed economy applies regardless of whether the spending is for good or bad purposes. In other words, even if we cut $100 billion from the government Department of Waste, Fraud, and Abuse, which does nothing but write reports and throw them in the garbage, it would still slow growth and raise unemployment. The problem facing the economy right now is demand, demand, and demand. If you reduce demand, you hurt the economy.

In the longer term, when the economy does get back to something resembling full employment, it will be helpful if we can eliminate wasteful areas of government spending. Of course it would also help the economy if we can expand useful areas of government spending. But that is not particularly a Keynesian story. I assume that almost anyone would agree with these propositions even if they might draw the lines differently between wasteful and useful.

Anyhow, the reference to Keynes is a bit peculiar here. If Cowan thinks he has argued for cuts that are consistent with the Keynesian view, he is mistaken. The idea that cuts in areas of relatively strong demand like health care will have less effect on employment is at best true in only a trivial sense. Wages are not rising especially rapidly in this sector, it is not as though we have any reason to believe that there would be large numbers of additional hires to replace workers who lose their jobs due to government cutbacks, even if the impact might be marginally less than cutbacks in other sectors.

Of course Cowan also brings in the reference to investor sentiment and refers to the bond-rating agencies. This is a strange argument for a strong believer in markets. The markets are yelling at us as loudly as they can that they have no fears about the health of the U.S. government and its ability to pay its debts, hence the 2.0 percent nominal interest rates on 10-year Treasury bonds. Why would Cowan take the word of bond-rating agencies who thought subpime mortgage backed securities were Aaa over the view of financial markets?

Anyhow, it is hard to know from this column whether Cowan thinks his preferred list of cuts won't slow growth and add to unemployment or whether the additional unemployment is a price worth paying to make the bond-rating agencies happy.

Comments (19)Add Comment
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written by RZ0, February 03, 2013 9:34
Tyler can opaque - sometimes on purpose, I think.
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written by JDM, February 03, 2013 9:40
If we'd cut some places and move the saved money to somewhere else, sure. But of course that's not cutting overall. You know, I don't know that much about money etc., but I don't find these things all that difficult to understand, not the broad outlines you need to know. But so many of these people seem to find this stuff incredibly mystifying... is it Sinclair's rule? ("It's is difficult to get a man to understand something when his job depends on not understanding it.")
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written by watermelonpunch, February 03, 2013 10:17
This Keynesian argument that cuts leads to unemployment in a depressed economy applies regardless of whether the spending is for good or bad purposes.


There's a disconnect for many it seems regarding just the basics.

If you say this, someone may think you're advocating for something bad, for the sake of keeping a few jobs. Like for example, someone might think it's akin to saying we should allow fraud because it employs some people, even while it does more harm on the whole.
Doesn't help that some people actually do advocate for that. ha ha (see: FHTM defenders)

A lot of average people don't take time to think about how everything in the economy must be connected.
I remember mentioning to someone quite intelligent, and liberal, about how the food stamp programme actually serves a dual purpose by providing food to people in need, plus as an economic stimulus, that more than $1 is generated in the economy for every $1 of food stamps.
I never saw someone react with such disgusted skeptical scoffing, as if I was COMPLETELY BONKERS to say something so outrageously stupid regarding math. I may as well have told them that there was a spaceship landed in their lawn.
If otherwise intelligent people can react this way about food stamps to feed the poor - imagine what saying "even bad things create stimulus" might come across as. Heresy! It would sound like bad math + complete & utter immorality.
Therefore, too dangerous to say, and so the workings behind it are left unexplained.

I think some economists fail to recognize this phenomenon, where the general public doesn't think about the interconnectedness of the economy.
Though I think some other economists know this full well, and exploit ignorance to advance their agendas.
In both cases the end result is an uninformed general public.

In the longer term, when the economy does get back to something resembling full employment, it will be helpful if we can eliminate wasteful areas of government spending. Of course it would also help the economy if we can expand useful areas of government spending. But that is not particularly a Keynesian story. I assume that almost anyone would agree with these propositions even if they might draw the lines differently between wasteful and useful.


Yes, most people would agree.
But again, only if they understand it.
Take for instance the topic of Medicare fraud. Few people would advocate to allow Medicare fraud I should think!
Yet there's a disconnect, where people can't grasp the idea of an ounce of prevention being worth a pound of cure, when it comes to hiring enough people to properly manage the problem.
I figure it's well known in private business, it takes money to make money, and that sometimes spending money saves money.
That say, an under-staffed government agency rushed and short of time & resources is likely to make more errors, or be more vulnerable to fraud, which in turn take more time to correct the errors than if the errors were never made in the first place, and the fraud may go undetected for years, and therefore a situation of under-staffing can actually cost more money.
I'm reading Peter Capelli's book right now, and apparently even all sorts of businesses are ignorant about how under-staffing may be costing them more money... because all they see is that one less employee means one less paycheck to write.

So clearly this failure among masses of people, to understand these things is at the very heart of this issue.
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written by Downpuppy, February 03, 2013 10:58
I don't know about Tyler Cowan, but Tyler Cowen is a government employee whose job could easily disapper in a cut. Could anyone argue that the closure of the George Mason Econ department would be a net social loss?
Not an economist...
written by Richard, February 03, 2013 11:10
but what I have read of Cowan's writings, he often manages to miss the point quite cluelessly
disingenuous
written by Peter K., February 03, 2013 11:16
Cowen:

"In the short run, lower military spending would lower gross domestic product, because the workers and resources in those areas wouldn’t be immediately re-employed. Still, that wouldn’t mean lower living standards for ordinary Americans, because most military spending does not provide us with direct private consumption."

lolwut?

Still those ordinary American workers and ordinary American resources wouldn't be re-employed in the private sector. In the past 4th quarter defense spending dropped 20 percent and GDP growth was negative.

Conservatives can't wrap their brains around the fact that things are different when there's a large output gap and high unemployment.
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written by Jesse, February 03, 2013 1:16

The key question that Dean does not consider is "Is all demand created equal? Is it all equal in its impact on the economy?"

Is it equivalent, equally effective, to give $1 Trillion dollars to the top 1 percent, as a policy to fuel their demand, or is it better to give $10,000 dollars to 100 million people?

This I submit is the crux of our problem. That, and the ongoing problem of corruption and fraud in the financial system taxing the efficiency of the demand function.

One thing we can all agree on
written by Chris, February 03, 2013 3:30
I suspect we can all agree that it is highly unlikely that Tyler will ever get a Nobel Prize.
Tyler is the Koch key for GMU
written by Ben Fenster, February 03, 2013 4:40
In reading Tyler Cowen one has to take into account that Tyler is the gatekeeper for Koch money at GMU. He needs to bow to the appropriate Koch philosophy or the well runs dry. That's why it often appears that he misunderstands basic economics. The wellbeing of his department depends on it.
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written by Fred Brack, February 03, 2013 9:34
It's the Tyler Cowans who have created such a muddle in macroeconomic public-policy discussions. Misrepresenting Keynes no longer seems to be a matter of ignorance but a deliberate tactic of affecting policy for ideological motives.

You might be hissing into the wind, Dr. Baker, but it's a valiant effort that merits applause.
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written by Chris Engel, February 04, 2013 1:47
Two things:

1) Cowen isn't relevant anymore. He had a brief period, but why bother anymore?

2) He seems to acknowledge a short-run hit to the economy, but I don't think he understands just how hard that hit will be, when cutting something as universally-understood as wasteful as military spending or farm subsidies. There has to obviously be boosts in other areas to make up for aggregate demand hits. This is NOT the time to start playing around with cuts, at all.

3) Bond vigilantes never have been real, investors aren't going to dumb Treasuries, and they don't trust any other dollar-denominated assets. And if they were to dump the dollar then to go into Bunds or some other safe non-dollar asset, they would have a hard time finding a credible hiding place.

The fact is that as long as the Fed is holding down short-term rates, and as long as the economy is flat like Japan's has been for 2 decades, then investors won't be dumping Treasuries any time soon. Until there are areas of growth in other areas that would imply future possible inflation, then investors will stay put.

I really wish Dean would beat the drums a bit harder on the fact that there is ZERO default risk (aside from political stupidity) on Treasuries. The yield reflects inflation expectations/risk into the future, and of course the short-term rates that the Fed controls.

Repayment risk is a non-factor. Look at all of the supposed "attacks of the bond vigilantes" historically --- they all correspond to increases by the Fed in the funds rate/discount rate that of course signal an attempt to calm growth down and stave off future inflation risks.

Krugman has finally started to come around on this and I think the other progressives need to really follow suit already, so we can stop having a discussion about whether the US will default, ever, since it's just not possible, it's just a stupid sideshow that the world laughs at us about.
spending is not transfers.
written by pete, February 04, 2013 4:32
Re Dept. of Waste Fraud and Abuse...hire the unemployed, paying them the same wage as their unemployment, plus 1 cent. This would not impact GDP one iota. Buying tanks, that matters. If tank builders switch to cars, that would be great. Actually nice article this weekend on how real personal income tanked during WWII, even though GDP skyrocketed. Kind of like since the 70s, where huge growth, thanks to deficit financing and loose money, but all the rents going to capital, as Keynes suggested indirectly (gotta get those darn wages down!)
On the failure of economists to inform the people
written by Min, February 04, 2013 8:32
watermelonpunch: "A lot of average people don't take time to think about how everything in the economy must be connected.
I remember mentioning to someone quite intelligent, and liberal, about how the food stamp programme actually serves a dual purpose by providing food to people in need, plus as an economic stimulus, that more than $1 is generated in the economy for every $1 of food stamps.
"I never saw someone react with such disgusted skeptical scoffing, as if I was COMPLETELY BONKERS to say something so outrageously stupid regarding math."

Well, you did say something stupid. Everybody knows that money does not reproduce itself. What you were talking about was the circulation and velocity of money, not its generation. There is a lot of sloppy language in the public discourse about economics. Speak clearly and accurately and intelligent people will listen.
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written by Calgacus, February 05, 2013 2:01
Min, I think you are being hard on watermelonpunch. His remarks are easier to interpret consistently than most of the spew of modern "economics" of the last few decades.

Money can "reproduce" itself, e.g. if it is used as capital for banking. Currency, the state's money or the money of any particular issuer like a bank cannot reproduce itself, because only that issuer can issue that issuer's money/liability. But the state issuing its high-powered money, like Food Stamps, can multiplierly cause the issuance of more money lower down on the pyramid of money, bank money. (E.g. a bank loan to set up a grocery in a poor neighborhood that will only be profitable because of the existence of the Food Stamps program)

There is a lot of sloppy language in the public discourse about economics. There is far more in academic economics literature, generally speaking written for insane, innumerate morons by insane, innumerate morons, to the greater glory of greed-crazed but numerate monsters. Ordinary usage is less sloppy, more scientific and logical.
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written by watermelonpunch, February 06, 2013 3:42
@ min

When did I say money reproduces itself anyway? Oh, that's right - I didn't!

Tip: Your manners do not recommend your opinions when you lead with an insult.
You might want to consider Dale Carnegie's book as supplemental reading material. It's pretty hard to win someone over to your argument or educate someone on something after you've already insulted them.
It's a real gaffe if you're actually educated in economics, because I AM the average citizen who needs accurate information.

Note: I have posted all the links on this page:
http://www.watermelonpunch.com/wordpress/generates-rebuttal/
Because the comment system doesn't allow multiple links, (which are necessary for illustrating my point).

SNAP also matters for local economies. Based on USDA research, it is estimated that each one dollar in federally funded SNAP benefits generates $1.79 in economic activity.


Every $5 in new food stamp benefits generates almost twice as much ($9.20) in total community spending.


Food stamp redemptions are good for retailers. In 2009, they pumped $50 billion into the economy. And, according to a 2008 USDA publication, the benefits extend beyond stores: “Every $5 in new food stamp benefits generates a total of $9.20 in community spending,” and each “$1 billion of retail food demand by food stamp recipients generates 3,300 farm jobs.”


The report found that “some provide a lot of bang for the buck to the economy. Others … don’t,” said economist Mark Zandi.
In findings echoed by other economists and studies, he said the study shows the fastest way to infuse money into the economy is through expanding the food-stamp program. For every dollar spent on that program $1.73 is generated throughout the economy, he said.


Add to that the research by both public and private outfits suggesting food stamps can actually generate wealth by juicing GDP, and what you’ve got is a reasonably strong argument for giving needy people the benefit of the doubt at a time of slower-than-expected economic recovery.


Enough for ya?

I'm using the terminology I've learned from official sources.

If that's not good enough, that's hardly my fault is it now?

If that language is not strictly accurate. Then that only proves my point that it's the people who should know better who are lacking in the realm of educating the public.
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written by Min, February 06, 2013 4:20
galgacus: "Money can "reproduce" itself, e.g. if it is used as capital for banking."

No disagreement. If $1 in food stamps induces a bank to create money by lending, we can talk about that $1 reproducing itself and generating more money. But that is not what we were talking about. The food stamp dollar could also induce someone to pay down their credit card debt, producing the opposite effect.
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written by Min, February 06, 2013 4:49
@watermelonpunch

I did not mean to be insulting. I was defending your friend, whom you presented as a boob.

What you said was this: "as an economic stimulus, . . . more than $1 is generated in the economy for every $1 of food stamps"

So you start with $1 and generate more than $1. IOW, one dollar produces more than one dollar. Reproduction is another way of saying that. One ancient argument against charging interest was that money does not reproduce. Great thinkers such as Aristotle and Aquinas made that argument. No wonder your friend reacted as he did.

Some of your quotes:

"each one dollar in federally funded SNAP benefits generates $1.79 in economic activity"

"Every $5 in new food stamp benefits generates almost twice as much ($9.20) in total community spending."

“$1 billion of retail food demand by food stamp recipients generates 3,300 farm jobs.”

"food stamps can actually generate wealth by juicing GDP"

The food stamp dollars do not generate other dollars, they generate economic activity, spending, jobs, and wealth. (It is the spending that creates the wealth, in the form of new goods and services.) Only Zandi says that they generate dollars, and that was careless of him.

I expect that you are right that your friend had not thought through the connections in the economy. But he or she also reacted to what sounded patently absurd. From your report, it also sounds like you did not manage to clarify what you meant.
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written by watermelonpunch, February 06, 2013 11:22
@ min

I did not mean to be insulting. I was defending your friend, whom you presented as a boob.


That was YOUR interpretation based on whatever preconceived ideas YOU have about the uninformed.

"My friend" (so far as I know), is not here and does not need defending. But I, on the other hand, AM here.

I was stressing that it's not a "stupid" reaction for someone to act that way if they don't know about these things. Thus my emphasis that the person was intelligent. Obviously nobody ever did a good job of getting them to think about the economy big picture, in a useful way.
That isn't their fault!

And how is this my fault? I'm no economics expert!
Why is it upon ME to try and inform people?
Because that's the burden I feel, and I feel it's unfair that I've been put into this position! When there are perfectly capable experts & reporters out there who should be doing this better.

But he or she also reacted to what sounded patently absurd.


HULLO. Almost everything about economics and the financial industry sounds PATENTLY ABSURD to average people!
That was my point!

Why do you think so many people were baffled & upset about the financial crisis?
Most people weren't just mad that some people were making a lot of money at someone else's expense. That's not exactly applauded by the general public, but that alone would hardly be particularly shocking.

The truly breathtaking part was what people were doing that was what caused it seems PATENTLY ABSURD.

One ancient argument against charging interest was that money does not reproduce. Great thinkers such as Aristotle and Aquinas made that argument. No wonder your friend reacted as he did.


Usury was also once forbidden as a sin by a lot of people.

But I don't see a lot of people in today's world foregoing mortgages, avoiding the money lenders, or refusing (the pittance) interest from savings & such, or even much criticism for it.

So while I'll grant that the idea that some people make LOTS of money doing nothing but just having money...
I think most people accept the value offered to people who don't have money, to be able to use someone else's money for awhile, so that some small reasonable fee for the service sounds perfectly reasonable.

Obviously at some point, the money lenders ADEQUATELY presented their case in a convincing way, that became generally accepted.

I think because ordinary people don't see interest as "reproducing money" or anything akin to that.
They see it as a sort of fee for service, calculated mathematically based on the amount of money.

In which case, Aristotle or whoever's arguments, would probably be irrelevant from the common attitude about interest!

I don't see that other economic concepts have yet come up with an adequate way of explaining this that is understandable & similarly palatable for the masses. And I don't think that's because the masses are boobs, or unintelligent, etc.

I think part of the problem is snobbery on the part of educated economists.

How many drop their unfortunate prejudice against ordinary people as "boobs", and actually try to explain these things to us in a way that we have time for??

Dean Baker seems to be one exception. Which is why I'm here. I think he's doing the best he can.

From your report, it also sounds like you did not manage to clarify what you meant.


You haven't managed to clarify your point about the distinction between the uses of the word "generates" to me.

To most users of the English language, I think your distinction is hardly helpful in making economics sound any less PATENTLY ABSURD.
If anything, I think your so-called clarification, makes it sound more complicated.

What's more, you still sound like you're STILL blaming ME.
Some of your quotes:

They're not my quotes! They're from legitimate sources, including an economist, respected media outlets like CNN & the LA Times, as well as the government.

And in fact, I stand by my repeating the word "generate" on the grounds of helping disseminate information.
IE: By repeating that word, I gave a keyword to someone, that they could easily use in an internet search, that would easily return applicable search results to further explain what I was talking about. (ie: that I wasn't just making silly crap up myself!)
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written by Min, February 06, 2013 3:06
@ watermelonpunch

"I stand by my repeating the word "generate" on the grounds of helping disseminate information."

It is not the verb "generate" that is the problem, it is the object of the verb.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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