Gatekeepers and herd behavior: On Tooze and the radicalization of Krugman

"But that one is holding the poop!"

Adam Tooze, the author of the monumental Crashed (who was, incidentally,  student of Wynne Godley, one of my mentors), wrote a piece for the London Review of Books that has received a lot of praise. While it reviews Paul Krugman's latest book, it provides an overview of the radicalization of New Keynesians, or at least some, that dominate both in academia, and in the corridors or power. The gatekeepers of knowledge and academic  and intellectual influence, with a close connection to power, so to speak. He tells us at the outset that Krugman, the economist that was a bulwark of free trade, even when the theories for which he received his Sveriges Riksbank Prize (aka the Nobel) suggested that some degree of intervention might be good, and that remained even after the 2008 crisis a defender of the conventional macroeconomic model, not only has moved to the left, but also that "in Joe Biden’s Washington, Krugmanism rules."

This is, however, a misinterpretation of the current situation. Tooze suggests that Krugman is one of the "high-powered centrists inching their way towards seemingly obvious political conclusions." The group includes "three centrists – Biden, Janet Yellen and Jerome Powell [that are] undertaking an experiment in economic policy of historic proportions." And he, also, argues that: "what sets Krugman apart within this cohort is the way he has, since the 1990s, stopped being a gatekeeper of the status quo and instead become its critic. In this respect his closest analogue is Joseph Stiglitz, also once of MIT, a member of the Clinton administration and chief economist to the World Bank. Both men have indisputable standing as members of the elite club of New Keynesians."

I see Krugman as being closer to what Colander, Holt and Rosser referred to as the cutting edge of the profession. The role of cutting edge of the profession, in my reply to them (see the paper in Fred Lee and Marc Lavoie's book here), is to make more reasonable policy propositions, while maintaining the notion that markets do produce efficient outcomes, in spite of the unsurmountable logical problems brought by the capital debates, and that led to the rise of vulgar economics. Krugman in that sense is the epitome of the cutting edge. Of course, in order to make reasonable points he would discard many of his own ideas. But he is no critic of the mainstream. The problem with Tooze's argument lies in there. Krugmanism cannot rule, if he basically had to discard his ideas in order to remain relevant. And relevant here simply means that he can be seen to be on the right side of history, more skeptical of free markets, free trade, and willing to accept significant expansion of deficits and debt.

The ideas that won the day and rule in Biden's America are heterodox ideas, that in fact, until very recently Krugman dismissed as not serious. The possibility of continuous expansion of the welfare state, and the expansion of fiscal deficits and debt were anathema to him. Not only he was against expansionary fiscal policy, but even 'Medicare for All,' the signature proposal of Senator Bernie Sanders, something that is common in all advanced economies, was dismissed as a political nonstarter. And certainly that idea, which is not that radical, has remained in the background, and is unlikely to be pushed by the 'radicalized' Biden administration. Perhaps even Krugman still thinks is far too lefty to be acceptable in the United States.

Biden might be the president, and he has a lot of power about what elements of the agenda to push, and he has certainly moved to the left. No doubt about that. Not surprisingly Heather Boushey and Jared Bernstein, economists with heterodox and labor connections, are defending the fiscal expansion from the Council of Economic Advisers (CEA), while Larry Summers, the quintessential insider of the Clinton and Obama administrations, is criticizing from outside. But the Democratic Party has moved to the left, and the politicians have followed. It is the party of Bernie and Alexandria Ocasio-Cortez (AOC). And the establishment knows they need to move if they want to remain relevant, and have a fighting chance in 2024, since the working class is radicalized, and many will abandon the party if Biden does not deliver.

They are like the French politician that, seeing the masses pass in protest, tells his friends in the café he must leave and follow them, since he is their leader. This is, it goes without saying, more like herd behavior, than leadership. Krugman is, in that sense, the leader of an intellectual sea change about views on the role of the state in the economy.

Tooze may think that these arguments are just the diatribes of those in the left that are angry,* infuriated he argues, with the slow pace of change in the center. The issue is that, even though Krugman is following the herd, he certainly is a central gatekeeper in the economics profession. A profession that has been attacked for good reasons, for its excessive influence in policy, and the recurrent blunders of its luminaries.

Krugman still argues in terms of the conventional model, that he defends, as having done a good job explaining the 2008 crisis. People like Wynne Godley, that truly foresaw the 2008 crisis, often only received the acknowledgement ex-post, sometimes too late, after passing away.** Krugman dismisses heterodox economists as not serious. A type of red-baiting of heterodox economists with significant impact on the ability of the profession to change. He also validates some of worst within the mainstream and is willing to play by their harsh rules.+ This is, of course, because the prestigious teaching positions he held, and still holds, the 'Nobel', that was created to give respectability to certain ideas, the weekly column in the NYTimes are all powerful platforms. The danger in this, in accepting Krugman's narrative that he has been right all along, is to convince ourselves that the profession has indeed changed. Now the dangers of neoliberalism and their main defenders, mainstream economists, are gone. The profession is rehabilitated. But the retreat of neoliberalism is only temporary. Krugman and other gatekeepers will change their tune when the current Keynesian moment passes. If the Bidenomics experiment ends up being of historic proportions, and I do hope it does, although that is still too soon to tell, it will not be a victory of Krugmanism. It will be a victory in spite of it.

* I am not as angry as Paul Romer, though.

** On Krugman critique of Godley's 'hydraulic' model, and my response go here.

+ He famously said: "By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote." [Italics added] See the quote and a discussion of the role of another gatekeeper in France that also won a 'Nobel' here.

A late note on the Economic Report of the President

This is a bit old. The Economic Report of the President was published a while ago. I just was looking recently, essentially because it has a chapter on the 70th anniversary of the Council of Economic Advisers (CEA). The report discusses the role of Leon Keyserling, the second chair of the CEA, but the most relevant one in the early period, who, like Eccles at the Fed, tends to be a relatively underestimated and forgotten influence on the rise of Keynesian economics (that's in this chapter). That is enough to make this Report worth reading.

But the first chapter (on inclusive growth) tackles the issue of inequality, and not just income, but wealth too. Below the shares in wealth distribution for the top 0.1%, 1% and the bottom 90%.

It's very clear that while the New Deal compressed the shares of the top groups, the Reagan Revolution has completely reversed the earlier achievements. And it is also clear that inequality is important also at the top, since the 0.1% do so much better than the 1%. And the early Keynesians like Keyserling and Eccles were partially responsible for the improvement in wealth and income equality back then.

Lauchlin Currie's review of Keynes' General Theory

Curried Keynesianism in action

 

The review with an intro can be read here (or here). Currie is often considered the first Keynesian in the Roosevelt administration (I suggested here that, while not a professional economist, that merit goes to Eccles), and was also the first to work in the White House, before the Employment Act and the creation of the Council of Economic Advisers (CEA). He was also later unjustly attacked as a Soviet spy, and Roger Sandilands has dealt with this here (subscription required). His biography of Currie is a must read.

Martin Feldstein on Wall Street Instability and Interest Rate Policy

Martin Feldstein, chairman of the Council of Economic Advisers (CEA) during the Reagan administration, and one of the most influential economists in policy circles says that: "Market participants know that the economy is now essentially at full employment, that the consumer-price index is close to 2% and that there is little risk of deflation."

Few things. This:

Broader measure of unemployment is at 10.4%. Then this:

That is, the increase in employment, for the growing population, since the crisis has been almost nil. And finally this:

That is, wages have not increased much in real terms (click on figure for a better image).

Also, the deflation that matters (again) is asset deflation, not CPI, or some broad price index, deflation. Funny thing is that Feldstein thinks it's possible that asset deflation would have real effects. He says: "Much of this mispricing will likely unwind in the months ahead. What isn’t clear is whether the fall of equity prices and other corrections will have adverse systemic effects as they did in 2007-08, bringing down consumer spending and business investment and thereby reversing the recent labor-market improvement. Only time will tell."

I'm more skeptical that the effect would be big. For most consumers the effects of the Wall Street crash are irrelevant. But clearly there is no risk of inflation. In sum, not at full employment, and inflation is not really a problem, since wages are subdued. So his call for higher interest rates is hard to defend. Unless there is something else going on.

PS: Feldstein was on the board of AIG for many years, and he received a lot of money (millions?) from the company, which was at the center of the financial meltdown in 2008. He never defended regulation of financial markets. It might be a coincidence of course that his personal interests and his views are well aligned. But it would be good to know who are his clients now. I mean, just to make sure that his advise on interest rates is not biased ("Nudge, nudge. Wink, wink. Say no more").

Rochon on Lavoie

The Progressive Economics Forum holds its annual meetings at the Canadian Economics Association (CEA) conference. This year we are at Ryerson University, Toronto, Thursday, May 28 to Sunday, May 31, 2015.

Introducing Marc Lavoie 
May 29, 2015

By Louis-Philippe Rochon

I am very honoured to be introducing this year’s guest speaker.

When I was asked to introduce him, I found myself in a bit of a conundrum.

After all, how can I possibly do this in just 5 minutes?  I mean it is impossible to do justice to his work over the last 35 years in such a short time.  His CV by the way is 40 pages long. So one would need quite possibly a good hour to cover all the important features of our guest’s distinguished career.

Marc Lavoie obtained his doctorate from Sorbonne Paris 1 in 1979 and arrived at the University of Ottawa the same year.  It was only a few years later, in 1983, I believe, that I had him as a professor.  I took Introduction to Post-Keynesian Economics  (with a hyphen!) largely because nothing else fit my schedule.  I must admit I was a bit reluctant to take the course as other students were telling me to stay away. But, I did anyways and the rest, as the old saying goes, is history.

Marc has a long – very long – list of publications.  To wit, he has published, at last count, over 120 peer-reviewed journal articles and 71 book articles; he has written 10 books, and edited another six.

Among the books he has written, we have an excellent first-year textbook, co-written with his colleague of 35 years, Mario Seccareccia, who was also my professor.

There is also a book that has contributed to the emergence of an entire new approach, the so-called stock-flow consistent approach, which has seduced a great many young, and not so young, scholars.  Today, there are a great many articles and conferences dedicated to that approach.

The book, Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, was co-written with Wynne Godley, and, like many of his other books, has had a tremendous impact on post-Keynesian economics.  It is safe to say that Marc has single-handedly given great empirical “legitimacy” to heterodox economics.

Another book is his Introduction to Post-Keynesian Economics. First written in French for the famous Repères series, I had the privilege of translating it in English (something by the way I will never do again, and I think Marc will agree on that!), and it has also been translated into Spanish, Japanese, Mandarin, with Italian and Korean translations in the works. I hear a Klingon version is next!

His most recent book, a greatly expanded version of his quintessential 1992 tome, is by any definition an essential book for anyone wanting to learn about post-Keynesian and heterodox economics. Indeed, Post-Keynesian Economics: New Foundations, in my opinion, towers high above all other books on the topic, and offers readers great insights into the essential features, both micro and macro, of post-Keynesian economics. In my opinion, this book is already a classic. I am certain, in several decades from now, it will be regarded as one of the greatest written on Post-Keynesian economics.

Among his edited volumes, I want to point to three in particular.  His most recent with Fred Lee (2013) In Defense of Post-Keynesian Economics and Heterodox Economics: Response to their Critics, is an excellent collection of articles addressing directly the many critics of heterodox economics.

Another book, entitled Money and Macroeconomic Issues: Alfred Eichner and Post-Keynesian Economics (2010), reflects on the great work of Alfred Eichner, an economist who has greatly influenced Marc’s thinking.  It is a book, which was co-edited by Mario Seccareccia and myself.

Finally, another great book, co-edited with Mario Seccareccia, on Central Banking in the Modern World: Alternative Perspectives (2004) has many excellent articles on credit, money and central banking.

Now, while many here know his writings in economic theory, monetary theory and policy, fiscal policy, endogenous money, growth theory, price theory, Marc also has a whole other life in sports economics. This is perhaps a reflection of his avid interest in sports, having been named not once, but twice, Carleton University’s Male Athlete of the Year (1973-74, 1974-75).  He is greatly passionate about fencing, for which he not only won the Canadian national senior championship in sabre seven times, but also represented Canada in the 1975, 1979 and 1983 Pan-American Games (where he finished 4th in the individual event in sabre in 1979). He also participated in the Commonwealth championships in 1974 (4th), 1978 (2nd) and 1982, and competed at the 1976 and the 1984 Summer Olympics.

He is currently Managing co-editor of the European Journal of Economics and Economic Theory: Intervention, and is on the editorial board or Executive Board of 13 journals, including my own journal, the Review of Keynesian Economics. He has lectured around the world, in far too many places to list.

There is no doubt that Marc’s contribution to economics and to post-Keynesian economics in particular has influenced a generation of scholars. Many regard him, and rightly so, as one the greatest scholars in the heterodox tradition. I concur.

As an example, I am currently editing a set of 3 anthologies in post-Keynesian economics for Edward Elgar.  So last month, out of curiosity, I posted a few messages on FB, asking the over 200 post-Keynesian and heterodox economists I know there from around the world, which was their most influential article on monetary theory.  Of those who replied to me by email, close to 80% stated that’s Marc’s 1996 article in the Scottish Journal of Political Economy was probably the most important post-Keynesian article on endogenous money, with another 15% mentioned his 1996 article in Money in Motion.

In closing, I need to mention one last important contribution.

Above, I often interchanged the word post-Keynesian for heterodox.  This was deliberate. It reflects Marc’s deep passion for a unified heterodox approach.  Where many of our colleagues, including myself, see differences and quarrels, Marc sees similarities and bridges among the various heterodox traditions; where some argued for the exclusion of some approach from the post-Keynesian family, Marc insisted on casting a large post-classical tent, and pointed to what united us rather than divided us.  This has been a consistent theme throughout his career and his writings.

I am running out of time.  Well, like I said, it is difficult to do justice to his long career in such a short time, and this was the root of the conundrum I faced. But well, upon deeper reflection, I guess there really is no conundrum.

I don’t need longer than 5 minutes, I am happy with less. Since in the end, we all agree, our distinguished guest needs no introduction.

Ladies and gentlemen, Marc Lavoie

For more information on the PEF at the CEA, see here.

The Economic Education of JFK: Arthur Okun's recollections

JFK with Dillon (first to JFK's right) and Heller (standing behind Dillon)

Nate has posted on JFK State of the Union address in 1963, when the tax cut was proposed to deal with the high level of unemployment of about 5.7 percent. Transcripts from an interview with Arthur Okun (of Okun's Law fame) conducted by David McComb and deposited at the LBJ Library tell the story of how that came to be.

Walter Heller was the chairman of the Council of Economic Advisers (CEA) at this time. Here is Okun on the CEA's views of the economic problem early in the JFK administration:

"The economist's diagnosis of the ills of the economy right at the start in 1961 was that it had been over-sedated with an excessively restrictive budget, which had so sapped its strength that you weren't getting the revenues from that budget; and therefore the budget looked as though it wasn't restrictive. Still you had a deficit, but the deficit was associated with trying to get too big a surplus and therefore holding down incomes and profits to the point where the revenues weren't coming in. We developed a concept called the 'full employment surplus' of trying to show where the budget would be if the economy was on a high employment growth path and trying to show that basically you had a much too tight budget, and that from the economist's point of view the right medicine was one of a more stimulative budget which would bring the economy to full employment, reduce unemployment,  strengthen investment, give us a lot more output for which there were and remain very urgent uses.  Obviously, this would mean in the short run that you'd have to do things which would make the budgetary deficit a lot bigger."

This was not the view held by Douglas Dillon, the then Secretary of Treasury, and a Republican one might add, and initially wasn't either Kennedy's view, since he had promised a balanced budget. As Okun's says: "There's no question that from the outset Dillon and Heller were giving President Kennedy quite different advice." Dillon remained a balanced budget defender. Okun tells the story of JFK's conversion to the Heller side.

"An amusing incident that I recall hearing about—President Kennedy made some statements that seemed to be wiggling off the hook of this balanced budget commitment at a press conference in August or September '61 . Dillon called him the next day and told him that we'd upset foreign bankers and urged him to clarify what he meant and reaffirm his determination. Walter, who had been delighted by the President's ability to see this more pragmatically, was told that Kennedy felt he had to do this, that he did indeed reaffirm that and that there was a balanced proposal in the fiscal '63 budget, which never materialized at all. I think the key manifestation of Kennedy's conversion to the Heller creed was the commencement address that Kennedy gave at Yale in June 1962, which was something—he really wanted to do this. And it was clear—again operating on other people's stories—he wanted a myth-exploding speech, and he ordered that it be focused on economic policy. He really went after the balanced budget myth as the key myth that needed to be destroyed."

On the substantive issue of what made JFK change his mind Okun is unclear, but Heller was central. And not just regarding the disputes within the administration. he says:

"I don't really know just how much of what kind of communication there was between Heller and President Kennedy. I know there was a flood of paper that went from the Council to the White House. Even after Kennedy was personally sold there was a further educational problem of convincing the public and convincing the Congress… Heller did a great job of public education. He got a lot of press attention to… try to popularize a notion that an underemployed economy was a great national waste. One of my first tasks on the Council was to try and estimate what our potential was. That estimate of potential output I guess remains my best known professional contribution as an economist. It's widely referred to as Okun's Law.’"

In fact, the education of the President, Congress and the public was in Okun's view the main task of the CEA at that time. In his words:

"But this was the first item on the priority list that the doctor could order for a patient. The problem was that of getting the patient to take the medicine rather than knowing what to prescribe. It was that that put all the emphasis on Educating the President, the Congress, the public, making the case publicly—you know, really improving the packaging, the labeling, the palatability of the medicine rather than improving the prescription at that time. Obviously, we did a lot of economic analysis on how big a tax cut we'd like ideally, what the appropriate unemployment target might be, what could be done to supplement general fiscal policy through manpower programs, how well guideposts could help to fend off the evil day that inflation reared its ugly head, and all that. But I think still you'd find that the largest emphasis of the Council's activity was on the salesmanship of a product rather than on the development of a superior product, because that was what the real need was."

After Kennedy's assassination Heller's task of educating LBJ wasn't as difficult. Again, according to Okun:

"I don't think he had as much trouble breaking down the balanced budget myth all over again. I think that notion of fiscal orthodoxy had been pretty well dispelled. I'm not sure it ever played as much of a part in President Johnson's ideology as it perhaps had in President Kennedy's."

Of course the task is much harder these days, since the doctors don't understand the problem and their diagnosis is often incorrect. Rather than a problem of public education, there is a problem of educating the doctors, the economics profession. The balanced budget myth and fiscal orthodoxy are back with a vengeance.

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.

Fiscal Conservative to head the Council of Economic Advisors

Jason Furman will be the new chairman of the CEA (see here). He is a veteran of the White House and a Democratic insider. He is also a fiscal conservative associated with Robert Rubin's Hamilton Project, whose mission calls for "combining public investment, a secure social safety net, and fiscal discipline." Yes discipline as in balanced budgets or 'sound finance', as they say, and lower spending, including reforming entitlements (aka privatizing social security, which is the real meaning of 'secure social safety net'). So don't expect any stimulus coming from the Obama team anytime soon. Obama seems to be stuck with the austerian paradigm.

Currie and the 1937-38 recession

Lauchlin Currie, the first economist to work in the White House (in 1939, that is, before the creation of the Council of Economic Advisers, CEA, in 1946) and main advisor to Marriner Eccles at the Fed, said this in a memo to Eccles in October 1937:

“When the Government disburses more to the community than it collects in taxes, it adds to national buying power and the demand for the products of industry. The excess of spending over tax receipts in the years 1935-36 was the primary factor in increasing national income, in increasing Federal revenues, in increasing national demand for goods and, hence, in finally making it profitable to make additions to plant capacity in 1936.
…
At a time when the national income is shrinking the Government is seeking to raise revenues and cut expenditures this merely intensifies the deflationary trend. We are in danger of starting again the hopeless attempt to increase Federal revenues when the national revenue is shrinking. The attempt failed in 1929-32. It will fall again. The only condition under which the Federal budget can be technically balanced in 1939 is a reversal of the present deflationary trend.”

I hope a memo like this has been sent to Bernanke. Hope springs eternal.

Alan Krueger to lead the CEA

The NYTimes reports that Alan Krueger will be the next chairman of the Council of Economic Advisors. A well respected, serious professor from Princeton, that almost everybody from Mankiw to Krugman will approve of. He is a labor economist, and yes that is a problem. My concern with labor economists, is that they tend to think in microeconomic terms when it comes to employment creation, and that is definitely not a solution for the current situation.

For example, the Times tells us that:

"Dr. Krueger was also one of the administration’s chief spokesmen for a payroll tax cut designed to encourage employers to hire, a policy that was in effect under the HIRE Act during 2010. The tax incentive, which was designed by Senators Chuck Schumer and Orrin Hatch after a raft of competing proposals floated through Washington, was criticized by some economists as being too small and ill-targeted to make much of a difference in hiring."

Don't get me wrong a reduction of payroll taxes, a regressive tax that burdens low income groups more heavily, is a good idea. But the reason is that it would stimulate consumption, not that it would reduce costs and lead to additional hiring. Why would a firm hire workers, because costs are lower, if they don't have demand for their products? Employment creation is NOT about incentives to the supply side, but about creating more demand!