LARS P. SYLL

Suggestion for Krugman’s reading list

As we all know Paul Krugman is very fond of referring to and defending the old and dear IS-LM model.

John Hicks, the man who invented it in his 1937 Econometrica review of Keynes’ General Theory – Mr. Keynes and the ‘Classics’. A Suggested Interpretation  – returned to it in an article in 1980 – IS-LM: an explanation –  in Journal of Post Keynesian Economics.  Self-critically he wrote:

I accordingly conclude that the only way in which IS-LM analysis usefully survives — as anything more than a classroom gadget, to be superseded, later on, by something better – is in application to a particular kind of causal analysis, where the use of equilibrium methods, even a drastic use of equilibrium methods, is not inappropriate. I have deliberately interpreted the equilibrium concept, to be used in such analysis, in a very stringent manner (some would say a pedantic manner) not because I want to tell the applied economist, who uses such methods, that he is in fact committing himself to anything which must appear to him to be so ridiculous, but because I want to ask him to try to assure himself that the divergences between reality and the theoretical model, which he is using to explain it, are no more than divergences which he is entitled to overlook. I am quite prepared to believe that there are cases where he is entitled to overlook them. But the issue is one which needs to be faced in each case.

When one turns to questions of policy, looking toward the future instead of the past, the use of equilibrium methods is still more suspect. For one cannot prescribe policy without considering at least the possibility that policy may be changed. There can be no change of policy if everything is to go on as expected-if the economy is to remain in what (however approximately) may be regarded as its existing equilibrium. It may be hoped that, after the change in policy, the economy will somehow, at some time in the future, settle into what may be regarded, in the same sense, as a new equilibrium; but there must necessarily be a stage before that equilibrium is reached …

I have paid no attention, in this article, to another weakness of IS-LM analysis, of which I am fully aware; for it is a weakness which it shares with General Theory itself. It is well known that in later developments of Keynesian theory, the long-term rate of interest (which does figure, excessively, in Keynes’ own presentation and is presumably represented by the r of the diagram) has been taken down a peg from the position it appeared to occupy in Keynes. We now know that it is not enough to think of the rate of interest as the single link between the financial and industrial sectors of the economy; for that really implies that a borrower can borrow as much as he likes at the rate of interest charged, no attention being paid to the security offered. As soon as one attends to questions of security, and to the financial intermediation that arises out of them, it becomes apparent that the dichotomy between the two curves of the IS-LM diagram must not be pressed too hard.

Back in 1937 John Hicks said that he was building a model of John Maynard Keynes’ General Theory. He wasn’t.

What Hicks acknowledges in 1980 is basically that his original review totally ignored the very core of Keynes’ theory – uncertainty. In doing this he actually turned the train of macroeconomics on the wrong tracks for decades. It’s about time that neoclassical economists – as Krugman, Mankiw, or what have you – set the record straight and stop promoting something that the creator himself admits was a total failure. Why not study the real thing itself – General Theory – in full and without looking the other way when it comes to non-ergodicity and uncertainty?

Det är dags att skrota det stabiliseringspolitiska ramverket!

Hur ska den ekonomiska politiken bäst föras i en “extrem situation” som den vi har idag?

Många nationalekonomer tycker att vi ska hålla fast vid det rådande stabiliseringspolitiska ramverket.

Men – inte ens den mest utrerade normpolitiken klarar sig utan en betydande grad av flexibilitet. Penning- och finanspolitik måste bedrivas på annorlunda sätt när vi befinner oss i en situation nära ”zero lower bound” och likviditetsfällor gör det svårt att föra en nödig expansiv penningpolitik. Här är det oftast optimalt att göra avvikelser från uppställda inflationsmål och tillämpa undantagsklausuler som ger centralbanker flexibilitet nog att avvika från den normpolitiskt styrda låginflationspolitiken.

Som flera forskare kunnat visa (t ex här) kan multiplikatoreffekterna mycket väl vara > 1 i dylika likviditetsfällor. Att i det läget – som i Sverige – avstå från att bedriva en expansiv finanspolitik och mestadels nöja sig med att genomföra skattesänkningar, är oftast kontraproduktivt, eftersom effekterna i stor utsträckning inskränker sig till att höja realräntan och öka det privata sparandet. I likviditetsfällor ger helt enkelt offentliga utgifter regelmässigt större ”bang for the buck” än skattesänkningar.

Att det i mer normala lägen inte skulle finns någon anledning att överge det normala
finanspolitiska regelverket är en klen tröst, när det visat sig att likviditetsfällor och skulddeflation är återkommande inslag i vår samhällsekonomi.

Vi lever i en ekonomiskt brydsam och omtumlande tid. Då räcker det inte med halvmessyrer och harhjärtade förslag som bara på marginalen ändrar på det stabiliseringspolitiska ramverket – eftersom det rådande ramverket med stor sannolikhet bidrar till att omöjliggöra en adekvat krisbekämpning i en “extrem situation” som den vi lever i idag.

Riksbankens inflationsmål på 2% uppfattas av etablissemangsekonomerna i det här landet som nästintill heligt och gudasänt. Andra av oss ekonomer är mer tveksamma. Paul Krugman och IMF delar – med rätta – inte detta smått religiösa vidhållande av målet på just 2%:

But why is the inflation target only 2 percent?

Actually, I understand why; the inflation hawks are still a powerful force that must be appeased. But the truth is that recent experience has made an overwhelming case for the proposition that the 2 percent or so implicit target prior to the Great Recession was too low, that 4 or 5 percent would be much better. Even the chief economist at the IMF says so …

The thing is, if we’re going to lock in a formal inflation target, now would be a good time to get it right, instead of waiting until the memory of the crisis fades and everyone gets complacent again.

Oxfordprofessorn Simon Wren-Lewis har idag på sin blog ett läsvärt inlägg som ytterligare förstärker bilden av att det börjar bli dags för ekonomkåren att att ta sig ur sin smått religiösa fixering vid i grunden ganska godtyckliga ekonomisk-politiska mål:

Good policy takes account of risks, and what you can do about them. Being at the zero lower bound means that you do not do things that deflate demand unless you believe growth will be strong anyway. If that is what the government believed in 2010 they were foolish indeed …
As I continue to be surprised at the number of very good and sensible economists who seem reluctant to acknowledge that fiscal policy matters for demand when monetary policy is constrained, I fear they might have been led astray in part by (selective) advice received …
However, I am still not sure. As the recession hit, Osborne consistently argued against fiscal stimulus. In April 2009, George Osborne [skuggfinansminister 2005-2010, sedan dess finansminister i Camerons koalitionsregering] gave a speech which included a short history of macroeconomic thought, even including references to the Lucas critique. It ended up with New Keynesian models, and he then said this:
“[New Keynesian] Models of this kind underpin our whole macroeconomic policy framework – in particular the idea that by using monetary policy to manage demand and control inflation you can keep unemployment low and stable. And they underpinned the argument David Cameron and I advanced last autumn – that monetary policy should bear the strain of stimulating demand – an argument echoed by the Governor of the Bank of England last month when he said that “monetary policy should bear the brunt of dealing with the ups and downs of the economy”. We now appear to be winning that argument hands down.”
The previous month, the Bank of England reduced interest rates to 0.5%, where they have remained ever since. So a month after interest rates hit the zero lower bound, Osborne gives a speech which included a perfectly sensible account of macroeconomic policy, except when you hit a zero lower bound. So perhaps they were after all ‘very foolish indeed’.

Att bedriva ekonomisk politik när vi har solsken och vackert väder är en sak. Att bedriva samma typ av ekonomisk normpolitik när väderleksrapporterna talar om stormbyar och mörka moln är verkligen ”very foolish indeed”.

Has “modern” macroeconomics delivered?

Jonathan Schlefer, research associate at Harvard Business School, has written a new book – The Assumptions Economists Make – on what “modern” macroeconomics has delivered during the last few decades. Although Schlefer shares Milton Friedman’s instrumentalist view on theories and models, he can’t really see that they have delivered what they promised – useful predictions. Justin Fox summarizes:

By that standard, here are Schlefer’s judgments on the succession of theories that have dominated academic macroeconomics since the 1970s:

Rational expectations (which proposed that we’re all too smart to be fooled by money-printing central bankers and deficit-spending governments): Intellectually interesting, and maybe helpful in “normal times,” whatever those are. But not very good at describing or predicting the actual behavior of the economy at any time, and worthless in a crisis.

Real business-cycle theory (which says that economic ups and downs are all caused by technology-induced changes in productivity): “[N]ot only are these models a tautology — they are a tautology that turns out to be wrong. They say that employment rises or falls because actors choose to work more when productivity is high and less when it’s low. This is nuts.”

DSGE (sometimes called “New Keynesian”) models: Not “quite as bad as they sound,” as they do describe an economy that moves along by fits and starts. They just don’t leave room for any crazy stuff.

Keen answers Krugman

Steve Keen has answered Krugman.
To the point.
Brief.
Read it!

Sänkta löner löser ingenting

För varje månad som går vinner konjunkturnedgången i Sverige i oavbruten styrka. De närmsta åren hotar bjuda på en långvarig konjunkturnedgång i den svenska ekonomin.

I detta minst sagt svåra läge – när ekonomin åter börjar hänga på repen – har vi de senaste veckorna kunnat läsa hur man från både regerings- och arbetsgivare-håll föreslagit att man ska försöka lösa krisen med hjälp av lönesänkningar i en eller annan form (inte minst ungdomslönerna har varit på tapeten).

Egentligen ska man nog främst se detta som ett tecken på hur lågt förtroendet för det ekonomiska systemet sjunkit. Från gårdagens nyliberala våtdrömmar om ekonomins kommandohöjder har vi sjunkit till den ekonomiska verklighetens bankkrascher, företagsnedläggelser och galopperande arbetslöshet. För det är ju självklart inte så att lönesänkningar räddar jobb. I en situation där krisen som började kring 2007-08 långt ifrån är över, varken globalt eller här hemma, har vi mer än något annat behov av stimulansåtgärder och en ekonomisk politik som leder till ökad effektiv efterfrågan.

På samhällsnivå ökar lönesänkningar bara risken för att ännu fler kommer att stå utan jobb. Att tro sig kunna lösa kriser på detta sätt är en tillbakagång till den förfelade ekonomiska teori och politik som John Maynard Keynes slutgiltigt gjorde upp med redan på 1930-talet. Det var en politik som gjorde miljontals människor världen över arbetslösa. Trettiotalsdepressionen åtföljdes av deflation som visserligen kunde innebära höjda reallöner – men bara för dem som lyckades behålla sina jobb.

Visst kan det kortsiktigt fungera för enskilda företag och fackföreningar att satsa på frysta eller sänkta löner. Men det är ett atomistiskt felslut att tro att en generell lönesänkningspolitik skulle främja ekonomin. Tvärtom. Som Keynes visade blir den aggregerade effekten av lönesänkningar katastrofal. De sätter igång en kumulativ prissänknings-spiral som får företags och enskildas skulder att realt öka eftersom skulderna nominellt inte påverkas av den allmänna pris- och löneutvecklingen. I en ekonomi som alltmer kommit att bygga på ökat låntagande och skuldsättning blir detta inkörsporten till en deflationskris. Detta i sin tur leder till att ingen vill låna pengar och kapital eftersom betalningsbördan över tiden blir för betungande. Företag blir insolventa, investeringarna minskar, arbetslösheten ökar och depressionen står för dörren.

Låt oss tala. Och tala tydligt. Risken för skulddeflation kan aldrig bagatelliseras. Ser vi på svenska data över inflationsförändring och BNP för åren 1980-2008 kan vi konstatera att för varje punkt som den reala BNP understiger den potentiella BNP så tenderar inflationstakten att minska med en halv punkt. Detta måste tas på fullt allvar. Om gapet mellan real och potentiell BNP ökar de närmsta åren innebär detta att deflationen snart riskerar bli ett faktum.

Det överhängande problemet för svensk ekonomi är att vi inte får fart på konsumtion och kreditgivning. Förtroende och effektiv efterfrågan måste återupprättas. Vi kan självklart inte bara sitta med armarna i kors och vänta på att ovädret drar vidare – men att föreslå krislösning byggd på sänkta löner är att skriva ut recept på än värre katastrofer. Vill regering och arbetsgivare ta samhällsansvar – och inte låta enfald få ersätta analysförmåga och besinning – måste de klart och tydligt ta avstånd från allehanda kortsiktiga och kontraproduktiva lönesänkningsstrategier. Skall man ta sig ur djupa ekonomiska svackor krävs vassare, bättre och effektivare instrument – som exempelvis en aktiv och offensiv finanspolitik.

Austerity in depressed economies

Paul Krugman has a niece piece today on his blog, commenting on the recently published paper by Brad DeLong and Larry Summers on fiscal policy in a depressed economy.
Even though the long-run effects of austerity policies may be minimal, they certainly impose large costs here and now. Self-evident conclusion: stop cutting and start stimulate, at least as long as we are stilled trapped in a liquidity trap.

I’ve been posting various versions of a scatterplot showing the relationship between one indicator of fiscal policy and growth since the crisis began. Here’s a version restricted to eurozone countries and countries maintaining a fixed exchange rate against the euro, with many of the countries labeled:

(All data from Eurostat).

Still, is this the kind of outcome you would have expected if you believed what the Austerians were saying? Or is it what you would have expected if you’d been reading those of us horrified by the turn to austerity?

What gets me about all of this is the incredible, unwarrented arrogance of the austerians. They decided that they knew better than textbook macroeconomics, even though none of them had predicted the crisis or even seen the possibility of such a crisis.

And the wreckage now lies all around us.

New-Keynesian macroeconomics and involuntary unemployment

People calling themselves “new-Keynesians” – a gross misnomer – ought to be rather embarrassed by the fact that the kind of microfounded dynamic stochastic general equilibrium models they use, cannot incorporate such a basic fact of reality as involuntary unemployment!

Of course, working with representative agent models, this should come as no surprise. If one representative agent is employed, all representative agents are. The kind of unemployment that occurs is voluntary, since it is only adjustments of the hours of work that these optimizing agents make to maximize their utility.

Being a “new-Keynesian” it ought to be of interest to know what Keynes had to say on the issue. In General Theory (1937, chapter 2), he writes: 

The classical school [maintains that] while the demand for labour at the existing money-wage may be satisfied before everyone willing to work at this wage is employed, this situation is due to an open or tacit agreement amongst workers not to work for less, and that if labour as a whole would agree to a reduction of money-wages more employment would be forthcoming. If this is the case, such unemployment, though apparently involuntary, is not strictly so, and ought to be included under the above category of ‘voluntary’ unemployment due to the effects of collective bargaining, etc …

The classical theory … is best regarded as a theory of distribution in conditions of full employment. So long as the classical postulates hold good, unemployment, which is in the above sense involuntary, cannot occur. Apparent unemployment must, therefore, be the result either of temporary loss of work of the ‘between jobs’ type or of intermittent demand for highly specialised resources or of the effect of a trade union ‘closed shop’ on the employment of free labour. Thus writers in the classical tradition, overlooking the special assumption underlying their theory, have been driven inevitably to the conclusion, perfectly logical on their assumption, that apparent unemployment (apart from the admitted exceptions) must be due at bottom to a refusal by the unemployed factors to accept a reward which corresponds to their marginal productivity …

Obviously, however, if the classical theory is only applicable to the case of full employment, it is fallacious to apply it to the problems of involuntary unemployment – if there be such a thing (and who will deny it?). The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight – as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics. We need to throw over the second postulate of the classical doctrine and to work out the behaviour of a system in which involuntary unemployment in the strict sense is possible.

The final court of appeal for macroeconomic models is the real world, and as long as no convincing justification is put forward for how the inferential bridging de facto is made, macroeconomic modelbuilding is little more than “hand waving” that give us rather little warrant for making inductive inferences from models to real world target systems. If substantive questions about the real world are being posed, it is the formalistic-mathematical representations utilized to analyze them that have to match reality, not the other way around.