It’s the Economy, Stupid: But Why So Stupid?

By Jim Arrowsmith, May 2nd, 2012
Ostrich at the Louisville Zoo © Ltshears | Wikimedia Commons

Arrowsmith was an economics professor at the City College of New York. After he left that position, he worked for many years as a business economist for a multinational oil company, where, like most corporate economists, he used a macroeconomic framework essentially based on Keynes. -Jeff

Whatever can explain the rise of mass hysteria over the U.S. national debt and federal deficits? To be sure, debt/deficit issues give the Administration’s political opponents a grand weapon in the gladiatorial contest that constitutes the nation’s public politics, but the issue only works because of a virulent public antipathy to serious macroeconomic analysis that has developed over the past four decades. In 1971, President Nixon announced “now I am a Keynesian,” but by 2011, President Obama (in his State of the Union address) said “Every day, families have to live within their means. They deserve a government that will do the same.”

In this environment, as the U.S. continues to suffer from massive unemployment of labor and underutilization of physical and intellectual capital, political survival almost requires economic policy-makers to pay obeisance to the most primitive anti-Keynesian economic theology.

The proverbial Martian certainly would not anticipate such widespread disdain for serious macroeconomics from the overall educational endowment of the American population. By historical standards, the U.S. population is highly educated, with over 40 percent of the labor force having completed tertiary education as of the end of the last decade and annual four-year college graduations reaching 1.6 million. While only about 3-5 percent of U.S. undergraduates major in economics, a far larger proportion experience some exposure to economics. Although data are far from perfect, the best estimates suggest that half undergo a one-semester introductory course and as many as one third of the total cohort take a two-semester sequence. At first blush, even with the most cynical view of the seriousness of students or their instructors, this suggests that a substantial part of the electorate might be expected to have assimilated central theoretical concepts such as the intrinsic difference between the national economy and the individual household and the potential use . . .

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May 2nd, 2012 | Tags: , , , , , ,

Unemployment Equilibrium: Keynesianism 103

By William Milberg, September 8th, 2011
John Maynard Keynes © Desconocido | Wikimedia Commons from Michael Holroyd, Lytton Strachey: A Critical Biography (1967), Volume 1

The failure of economics in the runup to and aftermath of the Great Recession has generated a lively debate about how to reform economics and more specifically about the renewed relevance of Keynesian economics, which had fallen out of favor since the 1970s. The Keynesian message, so important in this latest round of political wrangling over the increase in the US debt ceiling, is that cutting government spending in a slump will only worsen the unemployment problem. The role of expansionary fiscal policy, according to Keynesianism 101, is to provide demand for goods (and thus for employees to produce those goods) when the main sources of demand in a capitalist economy — households and businesses – are not providing a level of demand necessary to generate a socially acceptable level of unemployment.

Keynesianism 102 is about the multiplier effect of changes in spending. This is the notion that an increase in demand (from any source, not just government but certainly including government) will impact employment and incomes with a ripple effect. This includes a direct impact and then a secondary impact when the direct incomes are then spent (in some fraction) and an additional fraction of that is spent, etc.

There are two corollaries to the lesson of Keynesianism 102 that are worth mentioning because they have been raised in the current policy debate. The first is about the differential multiplier effect of a spending increase compared to a tax cut. Empirical studies show that the multiplier effect of the former is greater than the multiplier effect of the latter. The second is about the differential multiplier effect depending on the income of the recipients. Since the poor are more likely to spend a higher percentage of additional disposable income than the rich, a tax cut that benefits low-income people will have a bigger multiplier effect than a tax cut that benefits the rich.

These lessons have not been integrated into current economic policy in the US, where deficit spending and progressive tax reform and expanded benefits for . . .

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September 8th, 2011 | Tags: , , , , , , , , , , , , , ,

Waiting for the New Keynes

By William Milberg, February 24th, 2011
Waiting for the new Keynes

The current economic slowdown constitutes a breakdown for advanced capitalism. Its means of allocating capital – financial markets – froze up and would have collapsed completely if governments had not intervened on a massive scale. The rates of growth of output and employment in most industrialized countries are anemic and persistent. Does not the breakdown of capitalism require some fundamental rethinking of its explanation system, aka economic theory? Today’s troubles and the failure of most economists to predict them have given rise to a lively debate within the discipline about the sources of failure of economic theory and the ways in which it should be reformed. This is a good sign. But the current debate among economists is shallow and confined to a tweaking of its existing toolkit. There is no indication that this debate will produce the intellectual revolution needed to respond to the theoretical and policy challenges facing industrialized countries.

The discipline of economics has been no stranger to methodological controversy. The Methodenstreit (debate over method) among German social scientists in the 1880s, the Keynesian revolution in the 1930s, the ‘F-twist’ debate in the 1960s over the importance of realism of assumptions, and the ‘Cambridge controversy’ over the meaning of capital in the 1970s are some of the most notable debates. But not all methodological discussions are created equal. Some are profound—questioning the very structure of the reigning methodology—while others are more superficial, aiming at incremental reform or merely cosmetic change. We find that the current discussion is for the most part quite shallow, and will remain so unless certain voices in the debate are given more emphasis.

The central problem is that almost nobody dares to rethink the nature of economic life and the proper scope of economic thinking. This deeper approach is precisely what we find in the Methodenstreit and in Keynes’ innovations. On its surface the Methodenstreit was a debate over whether concrete historical analysis or mathematical modeling was better suited to explain economics. But this question ultimately rested on the question of what the realm of political . . .

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February 24th, 2011 | Tags: , , , ,