Wednesday, 23 January 2013

If you do not understand Keynesianism do not write about it!

Sinclair Davidson has a column on Arnold Kling writing about Keynesian-economic-policy except he doesn't!

Let us examine it in detail.

1. Firstly he says the historical record shows Keynesian economic policy doesn't work. He then quotes Robert Murphy who he claims shows this but he doesn't. Actually every example of 'expansionary austerity' he cites supports Keynes contention you only do it in good times. ( Remember the IMF study on this?)
Robert Murphy is not a good 'scholar to cite

2. The macro-economic models trotted out to support Keynesian policies are highly suspect. Arnold Kling cites err Arnold Kling. wow! Only problem is that the policies are not Keynesian. Wait for it!

3. He claims that if the Keynesian rationale for deficits in recession is correct then then must be times for balanced budgets or even surpluses but most of the time there have been deficits. This doesn't make sense.
Yes any Keynesian would argue in good times you would not have a deficit. Why do they gert the blame when deficits happen when Keynesians claim otherwise!

4.He claims no Keynesian economist is coming forward to say perpetual deficits are appropriate. huh! Has this bloke ever read say Paul Krugman, Brad De Long, Larry Summers Simon Wren-Johnson, Jonathon Portes.......

5. He says the recession ended on June 2009 so therefore so should deficits.  Yikes this has tonnes (get it) of errors.
Firstly if you end deficits too early you go back to recessions. See USA 1937 or Japan 1997.
Deficits can still occur because it takes time for the cyclical part of the budget to adjust to the economy.

I am going to stop there.

Plenty of holes. How ironic that Sinclair Davidson, a person who criticises anyone who gets Hayek minutely wrong , give Arnold Kling full exposure when he isn't even criticising Keynesian policy.

The expurgated version of Keynesian policy.
You only use fiscal policy when monetary policy isn't working ,In other words when there is a liquidity trap.
This does not happen in usual recessions. It usually only occurs in Depressions but it did occur in the GFC.

Let us make it very simple. A government should rarely if ever use fiscal policy when the economy weakens.
It is more likely to use sorry it should use Keynesian policy in good times

Postscript
Samuel J writes appallingly on fiscal policy at the same blog. I cannot be bothered to go through his lack of understanding on why budgets are in deficits or surpluses ( as I have done this previously )but even a a simple minded fellow would realise if an economy is facing below trend NOMINAL GDP growth then things are not normal. Duh!  Don't write about topics you clearly do not understand.

Further Postscript
Could those friends of mine ( who all put up their fees this year (attempted humour)) please use the comments section. It means much fewer additions to the original post and also helps me.  It shows up mistakes and bad assumptions for one thing.

In normal times nominal GDP and Real GDP are closely related. however as a wise old sage once told me when I was newly arrived in financial markets. You should always use nominal GDP for examining budget outcomes because at some stage real GDP and nominal GDP will digress. In recent times we have had above trend real GDP BUT below trend nominal GDP. This discrepancy has been caused by amongst other things disinflation.
IF nominal GDP was above trend then the budget would be sailing very comfortably into surplus waters and the fiscal contraction by the public sector would be negligible.