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.
Nanute made this interesting comment about this discussion on a nonrelated post so I'm brining it here.
ReplyDelete"From your post. Stiglitz: 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.
This may be true. But, this seems to be looking at the issue in isolation. And, the question, with regard to needing less labor, raises the "lump of labor fallacy." IIRC, Sandwichman alluded to this in his comments at Nick's post. The monetary/fiscal debate, (which one has more impact on demand side constraints), is interesting. Monetarists seem to argue that there can be no positive effects on growth from fiscal stimulus. Or, maybe that's an oversimplification. Keynesian's argue that fiscal stimulus is more effective when the economy is in a depression and severely demand side constrained. We are seeing this argument play out under current conditions. It will be interesting to see the effects of major fiscal side "belt tightening", vs. monetary "stimulus." All the recent attempts by the Fed to stimulate via monetary measures, seem to have had very limited positive outcomes.Some have argued that the policy has created an "excess demand" for money. That is to say, more people are interested in holding on to cash as opposed to spending it. Without increased velocity, I don't think you can move the economy forward in a dramatic shift."
"As they say, expectations matter. And business entities know all too well, that national, state and local governments are hell bent on reducing deficits, which under current conditions, may in the end, actually end up causing more contraction and further debt in the long run. Cutting spending, reducing the government workforce, and reducing outlays for social programs will have major negative consequences for the demand side of the economy going forward."
Ok, Nanute. You are saying that Stiglitz commits the "lump of labor fallacy?" Stiglitz is looking at it in isolation from what?
ReplyDeleteWhat you say about belt tightening I agree with of course. As the chance of fiscal stimulus right now seems unlikely-we'll see if we can even get the payroll tax extension-this why many-myself included-have gravitated more to monetary policy. While I don't agree with Sumner that it's the only game in town, it's the only one right now due to dysfunctional politics.
Mike,
ReplyDeleteI don't know how this got posted on the other thread. I'm not accusing Stiglitz's of committing the lump of labor fallacy. The way he framed his argument, led Sandwichman, I believe, to make the observation that it had the appearance of that. Perhaps I could have been a bit clearer. The advances in technology that led to major increases in productivity at that time, certainly had a major impact on displacing a large number of workers. Does this mean that there were a finite number of jobs which were bound to validate the fallacy? Not likely. Remember, we're talking about the production of food in this case, not gizmos. Did the increases in productivity allow producers to raise prices? I'm sure there was still an adequate "demand" for food, there just wasn't enough income to pay for it. People were near starving, and there was no immediate help from the fiscal side to complete the cycle. Sort of a paradox if you will. There's plenty of food, plenty of people that need/want food, but no way of purchasing it.
Like I agree with Stiglitz that we have seen a structural displacement in today's economy. It started in the 90s with the internet boom. Many jobs were now eliminated or automated.
ReplyDeleteIn 2001 we had a tough recession that Greenspan claimed was short and shallow. What was different is that many former white collar workers were forced into low paying service jobs.
The credit bubble was able to disguise this for a few years. However it seems to me that the economy is structurally different now and it remains to be seen how many good jobs-with the emphasis on good-are now available as opposed to the past where there were usualy plenty to go around.
As I read him he's saying something like this happened at the time to the argicultural industry. If you elaborated a little on what the "lump sum of labor" fallacy is it would help.
From Krugman: Economists call it the "lump of labor fallacy." It's the idea that there is a fixed amount of work to be done in the world, so any increase in the amount each worker can produce reduces the number of available jobs. (A famous example: those dire warnings in the 1950's that automation would lead to mass unemployment.) As the derisive name suggests, it's an idea economists view with contempt, yet the fallacy makes a comeback whenever the economy is sluggish.http://www.pkarchive.org/column/100703.html
ReplyDeleteI agree that there is not a fixed amount of work in the world. However it seems to me that there can be periods when there are not enough decent jobs-or even crummy like now-jobs to go around.
ReplyDeleteEventually the economy changed from agriculutre to manufacturing, in the mean time there was misery.
In the long term there is no fixed amount of work in the world, in the short term there can be an "allocation" mismatch-too many chasing too few jobs.
ReplyDeleteI tried that link to no avail unfortunately.
Just google lump of labor fallacy, and you'll see the Krguman link. I agree with you. Unfortunately, it seems like any time there is a severe "shortage" of jobs, we're in an economic depression. What the latest innovation that will come along to fill the void? Don't know. It could be that technology advances have accelerated us too quickly to catch up, so to speak. Add the fact that we're a net importer/debt driven economy with a serious structural trade imbalance and you begin to see why climbing out of the hole is much more difficult this time around. In the meantime, I'd settle for massive stimulus type projects that Roosevelt instituted. Fat chance of that happening under current wrong headed thinking in Washington. Could individual states do it? They'd have to convince the public that raising taxes to pay for it would be worth the expense. (The balanced budget constraint.) BTW, I sent you a private e mail this morning.
ReplyDeleteOk cool. I will check it out. There may be signs that there are some new better paying service jobs-these require science and engineering experience.
ReplyDeleteThe bottom line as I wrote about in a previous post is that capital has become "too strong" for its own good vis a vis labor."
In the 60s there was a labor shortage, which capital didn't like as labor was too strong-the unions, high wages.
Today labor has been so weakened due to the Volcker Fed moving away from Full Employment policies and Reagan neutering the unions.
This hurts capital as well though as it kills effective demand.
Ok Nanute I have answered your email.
ReplyDelete