Nick Rowe Again Checks In About the Stiglitz Debates

      To an extent I'm still like a football team that's "happy just to be here" I mean for Nick Rowe-a noted economist-to take the time to answer a post of mine at all is exciting stuff. The head count here at Diary of a Republican Hater keeps rising. This is the second time we've had Nick Rowe here, we've also had Sumner's mentor George Selgin, Brad Delong has cited us on his twitterstorm-Brad when's it going to happen again, I mean prove to those who say you're really a mere moderate Republican wrong by doing something for a fellow lib-and Modern Monetary Theory (MMT) Scott Fullwiler has checked in.

    However as much fun as it is just to be here I gotta play a good game. So what did Mr. Rowe have to say? It seems to be a consensus among many "marcoeconomists" that Stiglitz is all wet in his latest piece that came out in Vanity Fair. This consensus of macroeconomists includes at a minimum Nick Rowe, Ryan Avernt and of course Scott Sumner.

   For Stiglitz's paper  http://www.vanityfair.com/politics/2012/01/stiglitz-depression-201201#

   For Nick Rowe http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/12/the-gizmo-theory-of-the-recession.html

   Scott Sumner  http://www.themoneyillusion.com/

    Ryan Avern'ts piece he aptly calls "Lesson of the 30s"

  http://www.economist.com/blogs/freeexchange/2011/12/business-cycles-0

    For more on the history here at Diary of a Republican Hater-we've only been around since June but already we're pretty "storied" http://diaryofarepublicanhater.blogspot.com/2011/12/scott-fullwiler-mr-mmt-drops-by.html

   These are the many economic celebrities we have sited here. Still waiting on you Paul Krugman. When will you simply leave a comment thereby showing your awareness of my existence? As for you Scott Sumner, you can pretend to have "better things to do" all you like, I just worry that if you don't check in soon, your relevance may peak...

   Anyway after my post yesterday to make sense of Stigltiz's piece and Sumners' reaction

   http://diaryofarepublicanhater.blogspot.com/2011/12/scott-sumner-faces-off-with-joe.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29

    Nick Rowe left this comment:

     "Stiglitz: "The cities weren’t spared—far from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers had to lay off workers, which further diminished demand for agricultural produce, driving down prices even more. Before long, this vicious circle affected the entire national economy."

     "That is precisely where he goes wrong. That is just really bad macroeconomics. If I put my Keynesian hat on, it's still really bad macroeconomics."

      I answered Rowe thus:

     "As I understand Stiglitz, his point is that due to improved productivity of "gizmos" if you will, the gizmo producers no longer need to hire anywhere near the level of previous labor in the gizmo producing industries.

      As there is nowhere for all these displaced gizmo laborers-let's say there are millions of such workers-their loss of income depresses demand. By this depressed demand, other producers in non-gizmo industries see their sales depressed, leading them to lay off millions from their industries, continuing the vicious circle as this further depresses demand.

     Mass unemployment depresses demand as I would understand it and this is his point.

     The real point is that increased productivity reduces the need for labor. This is where the depressed demand comes from.

     He answered my answer thus:

     Mike:

     If 100 gizmos are produced and sold each year, that creates 100 gizmo's worth of income for those who produced and sold those gizmos. It doesn't make any difference if they were produced by 100 workers, or by 1 very productive worker, with the other 99 being unemployed.

    An increase in productivity makes no difference to the income earned from producing gizmos, *measured in gizmos*, provided the total quantity of gizmos produced and sold stays the same.

   Now, an increase in productivity will probably reduce the price of gizmos, relative to non-gizmos. If so, the income from producing gizmos, *measured in terms of the non-gizmos it will buy*, will fall. But the income from producing non-gizmos, *measured in terms of the gizmos it will buy*, will rise by the same amount.

   One of the first things we explain in Intro Macroeconomics is that the production and sale of goods creates income equal to the value of the goods produced and sold. It's basic National income Accounting. And Joseph Stiglitz totally blew it, Nobel and all.

   If Stiglitz were a right wing economist, arguing against fiscal policy, making a basic mistake like this, Brad DeLong would have crucified him by now.

   For good measure Sandwichman answered Rowe's gizmo example with this:

   "Nick, if you put your Marshall hat on you would see that it's not bad macroeconomics because its beyond the frame where macroeconomics has anything useful to say. "

     Avernt in his criticism of Stiglitz complains that he has opened up a discussion that has already long been settled-'what caused the depression.'

    "I find his whole argument unfortunate, because I do think there are important structural changes occurring in the American economy that are contributing to a slowdown in real growth potential and to stagnating incomes and rising income inequality. I think he's right that the growth of the financial sector deserves a critical look. But rather than explore the implications of those problems, Mr Stiglitz wants us to reconsider a problem that macroeconomics has effectively solved. I don't get it."

    Yes macroeconomics has solved this problem. What was the problem again? The cause of the Great Depression.

      The fact that Stiglitz in being attacked by professional economists for practicing bad macroeconomics can be read in two ways. Either he is, or maybe professional economists are so bound to certain models that they can't grasp the real world. I'm not favoring one answer in particular.

      To back track a little, this debate comes down to an old one on the question of monetarism. A monetarist-certainly in the case of Sumner-denies that there is ever an acceptable time to have a fiscal stimulus. This is not so much because he denies it can even theoretically be effective in reviving demand but that it will always be counterproductive as in this case the Fed will always tighten as a response thereby cancelling it out.

    You can have either fiscal stimulus or monetary stimulus you can't have both and so you should-according to Sumner-prefer monetary stimulus as fiscal stimulus will give us a budget deficit. I myself don't really see what this inordinate fear of budget deficits is about, certainly think it's overblown-in any case they only matter when a Democrat is President. If you need more proof Newt is now proposing a flat tax scheme that would add close to $ 1trillion to the deficit every year-currently the deficit that the hawks are so alarmed about is about $1 trillion total and has dropped somewhat this year. It's pretty clear that when a Republican is President "Deficits don't matter" as Reagan proved and Cheney said, but when a Democrat is in the White House-Clinton and now Obama-they matter again.

   Jude Wanniski is smiling but never mind. In any case our current deficit has not hurt our "borrowing costs" in the least to the contrary U.S. debt is held by the market to be the safest in the world. The real debate is about the appropriate stimulus. As monetarists like Sumner don't deny-as some Right wing supply siders do-that the loss of effective demand is the cause of depressions, the debate is whether we should prefer fiscal or monetary stimulus. Again Sumner in principle always prefers monetary. There are some Keynesians who believe monetary stimulus has little effect and it may be that Stiglitz based on his latest paper is in this camp.

    There are also New Keynesians like Eggertsson who think both have a part to play. Krugman's position-he recently made Sumner quite jubilant by coming out in favor of it-is like mine: we'll take any stimulus we can get. While we don't agree with Sumner about fiscal stimulus there's clearly none on offer right now with this current Congress which is about the most unproductive of all time.

     Rowe's answer takes an agnostic position on this central debate-he doesn't let on in his post yesterday his feelings about fiscal stimulus-he may have in previous posts-but takes Stiglitz to task for bad macroeconomics, suggests that Stiglitz's strength is the world of microeconomics, etc.

    Essentially, Stiglitz is guilty of bad national income accounting:

    "an increase in productivity will probably reduce the price of gizmos, relative to non-gizmos. If so, the income from producing gizmos, *measured in terms of the non-gizmos it will buy*, will fall. But the income from producing non-gizmos, *measured in terms of the gizmos it will buy*, will rise by the same amount."

    "One of the first things we explain in Intro Macroeconomics is that the production and sale of goods creates income equal to the value of the goods produced and sold. It's basic National income Accounting. And Joseph Stiglitz totally blew it, Nobel and all."

    Stiglitz;s narrative is not so much that the gizmo making industry will see its income from producing these gizmos fall relative to the non-gizmos it will buy. It is this: the increase in agricultural productivity was due to better capital equipment. The equipment enables the gizmo companies to create many more gizmos with far fewer workers. The former gizmo workers are unemployed. In the case of agriculture in 1930, this represented many millions of workers, so demand contracted greatly.

     Is Rowe claiming that rising productivity through capital improvements can't lead to great unemployment? I don't think national income accounting rules this out.

    In a way Stiglitz's piece has provoked another debate besides the Sumner monetary-fiscal debate, namely what causes depressions. Avernt claims that it had been settled what caused the Depression. Yet he claims that he has some sympathy for the idea that structural changes can cause stagnation:

   "I do think there are important structural changes occurring in the American economy that are contributing to a slowdown in real growth potential and to stagnating incomes and rising income inequality."

    If he thinks these structural problems are here now why is Stiglitz wrong for saying the factored in the Depression? If this structural problem Stiglitz speaks of-which Avernt seems open to-is present it would require more government spending-in education particularly the sciences and would argue for doing more for low income groups who receive substandard education. Something about the terrible gap in U.S. math and Science compared to places like China and India would have to be looked at.

    Say this for Stiglitz whether or not he used some inappropriate "model" that has vexed Sumner, Rowe, and Avernt, the fact remains that he is right to put the issue of structural problems back on the table. Someone like Alan Greenspan even to this day never got that the recession of 2001 was not "short and shallow" but actually the worst one would had seen since the Depression. While the 3 million lost jobs were eventually gained back-still the net job gains under Bush were the weakest in modern times-most of these new jobs were badly paying service jobs.

   I'd rather get a guy who uses an inappropriate model but has some idea of what is going on in the real world than someone like Greenspan with an impeccable model who believes the recession of 2001 was short and shallow.