The Economist and the American Economy

It takes something for me to say that The Economist is probably right. Sure enough the cover of The Economist, which has led to many critiques, sarcastic comments, and plain mockery by some friends on the left, was a bit hyperbolic. But the main argument of the piece -- basically that the American economy did pretty well in the recovery from the Pandemic, and that the United States has done well when compared to other advanced economies, and better than it did in the last few recoveries, which is not the case with China, which still grows faster, but has slowed down -- is correct.

Regarding the recovery, it is clear that the US has outperformed most economies, and it is also true that to a great extent that is due to the fiscal packages from the Pandemic, including the Biden ones, that were derided by many, including many Dems, like Larry Summers (and inflation, which resulted from the supply chain problems, in the absence of significant conflict went down pretty fast).

 

Not only this was the first recovery that was NOT jobless in a while, as can be seen by the fact that real GDP went back to trend, it also puts in doubt the notion that there is some fundamental secular stagnation problem with the US economy.

There are, no doubt, structural issues, like increasing inequality, and an hegemonic challenge from China*, but no significant reason that dooms the economy to grow less in the long run. The lower growth was a result of policy decisions, not structural problems. As Steindl would have said, stagnation policies. Had Obama (and then Trump) pushed for a more robust fiscal expansion after the 2008/9 Great Recession as Christina Romer wanted (and contrary to what Larry Summers advocated) then the growth rate would have been higher, and perhaps even the deficits (as a share of GDP, with GDP growing faster) would have been smaller.

Trump's victory in 2016 is, to some extent, the result of that choice too (and not prosecuting the Wall Street crooks, in my view), and Kamala has failed to adopt a more populist tone during the campaign, which I hope does not end up leading to another turn to the far right. The limits to growth have been political, and the Dems have played a role in that. Paradoxically, Biden had moved to the left on that (his willingness to promote a more healthy fiscal expansion).

* On the exaggerated fears of the end of American hegemony, also very common on the left, I'll write later.

Keynes on the causes of the Great Depression

By 1932 a draft of the General Theory (GT) was basically finished, including the central concept of effective demand, and Keynes have moved away from the Wicksellian framework of the Treatise on Money (TM). From a policy point of view the new view implied that the cause of the Great Depression was less the high rates of interest (above the natural rate), and the emphasis on the Gold Standard, that had dominated his views in the TM, to a more straightforward blame on reduced spending in the US.

In The Means to Prosperity from 1933, in which most of his policy views were expounded (and published before the GT) Keynes argues that:

Note that he clearly suggests that the global crisis had its epicenter in the US. Also, even though he is concerned with the role of expenditure in the level of activity, he still refers to the recovery as having price effects ('raising world prices').

PS: Arguably those authors like Eichengreen and Temin that emphasize the role of the Gold Standard remain closer to the TM and its Wicksellian framework (which would make sense for New Keynesian authors), while Romer, even though she remains firmly wedded to the idea of a natural rate, would be closer to the Keynes of The Means to Prosperity and the GT. See older post here.

Peter Temin on the strange death of economic history

Peter Temin recounts in this paper the vanishing (apparently complete by 2010) of economic history from the MIT curriculum. History of thought has probably vanished even before, if it was taught at all. He says that:

"Economic history at MIT reached its peak in the 1970s with three teachers* of the subject to graduates and undergraduates alike. It declined until economic history vanished both from the faculty and the graduate program around 2010."

He notes that the most famous economic historian graduated from MIT was Christina Romer, which, it must be emphasized, in her famous paper on the Great Depression claims that fiscal policy (and to a great extent the New Deal) was not responsible for the recovery. For her it was the non-sterilized inflows of gold that increased the money supply [yep, the most important historian graduated at MIT is more of a Monetarist than a Keynesian; New Keynesians are peculiar that way; for more go here].

Ideologically this is the result of the same forces that led to Fukuyama's hubristic announcement of the death of history after the fall of real communism in Eastern Europe. And the New Economic History, that received two of the Sveriges Riksbank Prize in Economics (aka the Nobel, but not really) given to North and Fogel, is part of the problem, as Temin notes. He says:

"In terms of the class struggle ... the coalition of theory and econometrics left economic history out of power in the counsels of economics. Proponents of the New Economic History were using more and more econometrics in their work, but they were no match for theorists."

That is why Temin does not consider the work of Acemoglu, including his recent Why Nations Fail to be good economic history. In his words the book:

"is an example of Whig history in which good policies make for progress and bad policies preclude it. Only transitions from bad to good are considered in this colorful but still monotonic story. The clear implication is that if countries can copy the policies of English-speaking countries, they will prosper."

For my critique of the book go here. At any rate, economic history, as well as history of economic thought, should be at the center of the teaching of economics.

* Temin who was hired to replace W.W. Rostow, Evsey Domar and C. P. Kindleberger.

Bernanke on fiscal policy: Keynesian ma non troppo

I noted before that Christina Romer, who was the chairwoman of the CEA and responsible for the fiscal package in 2009, held views on the recovery from the Great Depression that were ironical given her position. She argued in her classic paper that fiscal policy was irrelevant. Another New Keynesian that held similar views was Ben Bernanke. He says, in a famous paper published in his Essays on the Great Depression trying to explain industrial output, that:

"In an attempt to control for fiscal policy, we also included measures of central government expenditure in our first estimated equations. Since the estimated coefficients were always negative (the wrong sign), small, and statistically insignificant, the government expenditure variable is excluded from the results reported here."

So in his view (and his co-author, Harold James) fiscal policy was not relevant for industrial recovery. This view was challenged here (a significantly modified paper was accepted for publication). It is worth remembering that the current state of the profession, in which Keynesian ideas are in the defensive and austerity is king, is at least in part the fault of New Keynesians.

Nominal output targeting

Christina Romer wrote this Sunday about the necessity for the Fed to target nominal output. The implication seems to be that so far the Fed had been targeting inflation, which is obviously incorrect. That would be the ECB. Krugman (here) for some reason liked it. By the way the idea is not new, Samuel Brittan had argued for that not long ago (here), and as noted by David Beckworth so have two other prominent FT columnists (Clive Crook and Martin Wolf).

First of all, Romer calls this a Volcker moment, which is from a historical point of view (and she is a macroeconomic historian) preposterous. Volcker is the guy that tried to use nominal monetary targets, as in Milton Friedman's monetary growth rule (now he is much better and is against de-regulation and too big too fail among other things).

Further, it's not clear how a nominal GDP target would be different from what the Fed is already doing, namely acting as a lender of last resort, and keeping interest rates (short and long, the latter through QE) low. Worse, her argument smells to the confidence fairy stuff you hear from the crazies serious people, and that correctly Krugman deplores. She says:

"By pledging to do whatever it takes to return nominal G.D.P. to its pre-crisis trajectory, the Fed could improve confidence and expectations of future growth."

Sure as objective targets come, nominal GDP is better than inflation,  but since the Fed does not target inflation what is she fighting? Ben Bernanke is fine, Super Mario (Mario Draghi), the new president of the ECB needs whatever is the reverse of a Volcker moment. The US (and Europe) need more fiscal expansion.

Christina Romer gets it right on the deficit

Romer's column in the NYTimes, a few days ago, is certainly worth reading. She says among other things:

"Fiscal austerity, not more stimulus, is the answer. This argument makes me crazy. There’s simply no evidence that concern about the current deficit is a significant factor limiting consumer spending or business investment. And government borrowing rates are at record lows, suggesting that financial markets are not worried about the deficit, either... The best evidence shows that fiscal austerity depresses growth and raises unemployment in the near term. That’s the experience of countries like Greece, Portugal and Britain, which have embarked on drastic deficit reduction plans over the last two years. Cut the current deficit and you will raise unemployment, not lower it."

It's high time for Keynesians, of any sort, that may have some influence with the President to be for fiscal expansion.