Cullen Roche Takes on Mark Sadowski on Fiscal Policy

 

    Things seem to have come to ahead. Sadowski complains that Roche has banned him which I don't agree with. I think here we have to give Sumner his due: he has not banned me or others he doesn't like. That is I think the better way to go.

      Still beyond this I have a bigger bone to pick with Mr. Roche. I have no problem with inspiring posts on the post Keynsian blogs-indeed I'm flattered by it. Still, what's wrong with doing attribution? So I will repost the comment I left at Sumner in full.

     UPDATE: Judging by my previous encounters with Mark Sadowski-he's not much fun that's for sure. 

    http://diaryofarepublicanhater.blogspot.com/2013/10/mark-sadowski-may-be-great-wonk-but-he.html

     http://diaryofarepublicanhater.blogspot.com/2013/10/mark-sadowski-and-my-apparent-war-with.htmll
    

    "Regarding Cullen I must say I don’t like the idea of banning people. While Scott probably would be glad if I didn’t comment at his blog again he has never gone this route-he has never banned anyone, not even Major Freedom."

    "While I like Cullen I don’t like that move. I think it’s better to engage even ideas you think are wrong.
I’ve actually been banned from a number of places-and they were all allegedly liberal blogs."

     http://diaryofarepublicanhater.blogspot.com/2011/08/banned-from-big-liberal-blogsophere.html

     "Actually my biggest complaint with Cullen is that this post of his was clearly borrowed from me-at least the title was."

     http://diaryofarepublicanhater.blogspot.com/2013/11/there-sumner-goes-again-announcing-that.html

     http://diaryofarepublicanhater.blogspot.com/2013/11/sumner-is-at-it-again-after-latest-job.html

    I don’t get it. I have no problem with Cullen or other post Keynesians using my ideas-indeed I’m flattered by it. However, cmon, Cullen-would it have been too much to admit that you got this idea from reading about it on Mike Norman-who had linked to my post there?"

    http://diaryofarepublicanhater.blogspot.com/2013/11/now-were-talking-mike-norman-and-walter.html

    "Randall Wray did the same thing last week-though it was inadvertant and he corrected it by linking to me when it was pointed out to him."

    http://diaryofarepublicanhater.blogspot.com/2013/11/ok-i-love-randall-wray-again.html

   "Listen, I love you guys. I have no problem being a major public resournce for the post Keynesian blogs-just admit where you got the stuff ok? I mean I’ve been writing about Sumner for ages. Now you’re finally getting it that’s great. still, attribution is the right thing to do. c’mon."

     http://www.themoneyillusion.com/?p=24740&cpage=2#comment-293572

     Here's the irony-I see that this comment hasn't been posted yet-it's 'awating moderation'-did I speak to soon?

     Ok, on the substance of the quarrel. Roche responded to Sumner's triumphalism by pointing out ways that Keynesianism-fiscal policy has had an impact-certainly does get it right.

    
    "[Snark on] Bad news Keynesians – you’ve been declared dead by Scott Sumner. And that means counter-cyclical policy of any type doesn’t work. Yes, it’s true. Just look at the evidence:

• By accounting identity, the government deficit has contributed enormously to corporate profits in recent years, but there’s no way that increased corporate profits help the economy.

• Adding trillions of dollars of net worth during a de-leveraging via the direct issuance of net financial assets via deficit spending, does not help private sector balance sheets despite the very basic accounting that proves otherwise.

• The Troubled Asset Relief Program, which helped our financial system avoid widespread calamity, did not work even though our financial system is far more stable than it was in 2008.

• The American Recovery and Reinvestment Act did nothing despite the CBO’s estimates of widespread positive economic impact.

     "Sorry Keynesians. Time to take your ball and go home, losers. [Snark off]"

     Read more at http://pragcap.com/scott-sumner-declares-keynesianism-dead#cGR5zqEvfcP5SIcK.99

     Mark and Cullen then provided to get in what can only be described as a pissing contest in the comments over just bullet point 1-whether a government deficit causes govt. profits. enough. However, points 2 through 4 aren't even touched.

    Mark insists that there's no correlation between corporate profits, the fiscal stance of the govt. and GDP.  Basically he denies that deficit spending increases profits and he even denies that profits cause higher GDP. He starts with the  Kalecki profits equation:

    "First, it’s helpful to review the Kalecki profits equation:

    "Profits = Investment – Household Savings – Government Savings – Foreign Savings + Dividends"

    He argues that there's something wrong with the way Roche used it as it's not exactly how Kalecki initially used it.

    "The first thing you should know is this is not exactly the same as the original Michal Kalecki profit equation. Kalecki never mentioned dividends. This was probably because Kalecki wasn’t talking about corporations but more generally about the entire business sector. Moreover Kalecki used the profit equation not to argue that fiscal policy drove profits, but to argue that business fixed investment drove profits."

    "Where does this equation, with this novel fiscal policy interpretation, come from?"

     "Well, about a year and a half ago Roche did a post on James Montier who derived this equation and who predicted at that time (GMO White Paper: “What Goes Up Must Come Down!”) as “the government moves toward some form of deficit reduction plan” this would lead to “mean reversion of profit margins”.

     "Well needless to say a year and a half later this prediction has not come to pass. Instead after tax corporate profits were 10.0% of GDP in 2013Q2, a level only exceeded once, in 2011Q4, when they reached 10.3% of GDP."

      "Because of this Roche felt compelled to do a post on the James Montier version of the Kalecki profit equation a couple of weeks ago where he explained (“Why Hasn’t the Budget Deficit Decline Hurt Corporate Profits More?”):

“…If we look at the components of profits the overall changes (or no changes) since 2012 have been:

*a substantial decline in overall government deficits (-31% YoY)
*modestly expanding private investment (+7.2% YoY)
*a substantial decline in private saving (-15% YoY)
*some deterioration in foreign saving (-5.8% YoY)
*a big rise in dividend payments (+40%)

     "In other words, the two main drivers that have offset the decline in the budget deficit have been dividend payments and household saving declines while investment growth has remained pretty steady in the high single digits…”

     "He goes on to explain the decline in household savings rate and the increase in dividends as being due to improved household net worth and “because corporate America is a lot healthier than it has been in a long time” (whatever that may mean). In particular he says:

“…In other words, if private saving, dividends and investment hadn’t continued to move higher in the last 18 months we would have seen a substantial decline in profits…”

     "Obviously he meant to say “…if private saving hadn’t continued to move lower, and dividends and investment higher…”. But stop and think about the most important of these three reasons: dividends."

     "This is a tautology. Dividends are a component of corporate profits, so it occurs on both sides of the equation. (This is especially clear if you read James Montier’s derivation.) This is tantamount to saying corporate profits went up…mostly because…corporate profits went up."

     "And at this point I turn the microphone over to Paul Krugman (“Fallacies of Immaculate Causation”), because sometimes Krugman just says it better than anyone else can:

     “The point, in any case, is that accounting identities can only tell you so much. Anyone who claims that the identities tell you everything you know, without an actual model of how things work, is just doing bad economics.”

     One obvious point is that just because a higher deficit can be a net plus to corporate profits doesn't mean that every year the deficit goes up profits will go up by just that same amount and vice versa-because the deficit decreases doesn't mean that profits will go down by that same amount-or even at all. 

   In the Kalecki equation there are other factors. If the other factors change the other way this offsets the effect of the deficit. So Sadowski is making it a little too simple. Cullen kind of touches on it here:

    "Of course there are limits to accounting. But anyone who denies that govt spending adds to corporate profits is just being disingenuous. Do you deny that govt spending on Boeing contracts, for instance, adds to profits? This isn’t even accounting. It’s just common sense. When the govt takes from Peter to pay Boeing, that increases corporate profits. You don’t need a model of the economy or an accounting degree for any of this."

   He should have pushed Mark more there-he won't answer that directly I don't think. However, he got sidetracked arguing about James Montier. I mean it's like any other equation with a few variables. In the case above, it looks like a drop in private savings was helpful to profits. Note that this is another point for Keynesianism-Keynes 'paradox of thrift'-which Sumner considers anathema as just like the Supply Sider he is, he believes with Say's Law that all saving is necessarily future spending. 

   I think that Cullen is wrong to ban Mark-I don't like calling people trolls just because you disagree with them-or even if they're wrong. Still he's certainly right here. 

  "I think I am beginning to realize that maybe you just have an agenda and really have no intention to argue in good faith with anyone. I don’t care that you so fervently defend Sumner, but when you do it by constantly changing the topic and just putting words in people’s mouths then there’s a problem with the way you’re engaging people. It’s not cool and I won’t be engaging you in the future or entertaining your commentary."

   He's right except the part of censoring the commentary. It's true that Mark is going to defend Sumner regardless that he has an agenda. Still I don't agree with shutting his mic off. I also disagree with Cullen not giving me attribution for the title or impetus-I'm sure he read this on my post linked at Mike Norman initially. What's wrong with a link Cullen?