Wednesday, April 6, 2011

The Depression Blues, sung by Randy Wray

Prof. L. Randall Wray is an original developer of MMT and professor at the University of Missouri at Kansas City, home of the Kansas City school of economics. He complains that Modern Budget Cutting Hooverians Want a Return to the 1930s.

"Our modern Hooverians would like to return to the “good old days” of President Hoover, when the government was smaller and both unwilling and unable to offset the swings of private investment spending. Back then, when investment collapsed unemployment did not go to 9 or 10 percent, it went all the way to 25 percent. Hooverian economics would turn back the clock to ring in another Great Depression with the same old pre-Keynesian ideas that failed us in the 1930s."

Wray tell us why:

"By framing their argument in terms of ratios to GDP, the authors provide a misleading characterization of cause and effect. It is true that high investment spending tends to increase GDP while lowering unemployment—that is the Keynesian “multiplier” at work. High growth of GDP, in turn, lowers the ratio of government spending to GDP so that we will observe a correlation between falling unemployment and a falling government share of GDP—but that is a correlation of no causal significance. When an investment boom collapses—as it did in 2006-2007—GDP growth then falls and the government share of a smaller GDP will rise. Our Hooverians interpret that as “proof” that a rising government share does not help to fight unemployment.

"In fact, however, relatively stable government spending over a cycle helps to cushion a private sector “bust”. While it is hard to prove the counterfactual—how bad would things have been without sustained government spending—it is hard to believe their argument that a loss of 8% of GDP due to reduction of private spending would not have led to a much deeper recession (or depression) without the stabilizing force of our government spending."

The argument of the Hooverians is that where there is a lot of crime, there are also a lot of police. So, to cut crime, reduce the number of police. Right.


Matt Franko said...

It looks like these depraved people focus on "private investment" above all economic outcomes. Employment is not on their radar screen.

Here is a CRS report one of these types of folks pointed out in another blog Excerpt:

"In the long run, economic growth is determined primarily by three factors: growth in the labor force, the rate of technological advance, and the amount of capital available to the workforce. Of the three, the last one may be the most susceptible to the influence of policymakers. The larger the capital stock, the more productive the labor force tends to be.
Although it may be possible for fiscal policy to have an effect on the rate of technological
progress in the way public money is spent, it probably has a much larger effect on growth through its influence on the size of the domestic stock of capital and the amount of capital available to each worker in the labor force. How this comes about can be illustrated by a brief introduction to economic accounting.
The total value of national output can be measured in two ways. Either the total value of the goods and services produced can be added up, or the total value of the incomes resulting from that production can be counted. These two accounts, at least in the abstract, add up to the same total.
The measure of total output based on the value of production is typically subdivided into several categories of demand. Specifically, it is calculated as the sum of consumption spending (C) investment (I), government spending (G) and the difference between exports (X) and imports (M):

GDP = C + I + G + (X - M).

The alternative measure of total output is the sum of the various uses to which income is
allocated. On this side of the economic accounting ledger the value of national output is expressed as the sum of consumption (C), private sector saving (S) , and tax payments (T):

GDP = C + S + T.

Combining the two equations, and simplifying gives:

I = S + (T - G) + (M - X).

That is, total investment spending is equal to the sum of private saving (S), the government
budget surplus (T - G, which, if it is negative, is a deficit), and the difference between imports and
exports of goods and services (M - X). The last equation is an identity. In other words, investment is by definition equal to the sum of private saving, the budget surplus, and net capital inflows from abroad. Other things being equal, a reduction in public sector saving means less investment
and slower growth in the capital stock."

You can see how the big equation they go for is I = blah, them "I" is the big thing to go for in policy. INVESTMENT not employment.

But look at their equation for 'I'. To have high 'I', you could have a balanced budget (T-G)=0; high net imports (M-X)>>0, and high savings S>>0. This may result in high 'I', but millions of unemployed!

AND, if the Govt runs a deficit, ie (T-G)>>0 then this is seen as reducing their precious 'I'. It seems to me the way these morons look at it, high govt SURPLUSES will increase investment.

This equation that they glorify and how they seek to position it is the mathematical definition of SERFDOM.

mike norman said...

Love this. Their precious "I."


Tom Hickey said...

"I" is tricky. It includes capital expenditure and inventory. They are erroneously presuming that "I" is always capital expenditure and planned inventory. It isn't.

This equation represents flow over a period. In that period, it could mean mounting unplanned inventory as saving increases. If there is budget surplus and net exports don't offset, then a lot of "I" is going to be inventory buildup. This portends a contraction in the next period.

Matt Franko said...


do you think this is where they get their 'crowding out' ideas?

ie a deficit 'crowds out' or results in lower levels of 'I' cet par? As the term (T-G) goes negative..

So this may be what these people are currently thinking:

Moron 1: "We need more 'I'!"

Moron 2: "But we already are running a trade deficit of 5% of GDP, and people are saving..what can be the problem?"

Moron 1: "I got it! It must be the fiscal balance then!"

Moron 2: "Yes that's it. The fiscal balance! Here's what we have to do then, let's cut government spending and increase taxes!"

Moron 1: "Brilliant!"


Tom Hickey said...

I think "crowding out" is essentially an interest rate argument. The thinking goes that government competing with the private sector to borrow raises interest rates, which makes investment more expensive, thereby reducing "I".

Of course, that is not happening now, so they explain this by government "printing money" to monetize the debt, which will lead to inflation and very high rates down the line. Why is there not more investment now wit low rates? The Ricardian argument that companies are saving to pay the taxes needed to pay down the government debt that is being accumulated now.

Calgacus said...

There's a longer version of Wray's article at Benzinga: