Posted by: graemebird | December 21, 2008

Greg Is Right To Be Humble:The Application Of Gross Domestic Revenue Analysis.

Fiscal policy doesn’t affect spending in any way except perhaps by serendipity. So its ludicrous to talk of fiscal stimulus. But Greg Mankiw doesn’t think so. Greg starts off in this post of his possibly feeling a bit miffed at being left out of team Obama. With its leftist Keynesian nutballs of all descriptions. Let us put to bed for all time the idea that Neoclassical types and supposed fans of Milton Friedman are not cut from the same cloth as the Keynesian thief-economists. We will go through the totality of this post of Greg Mankiws.

 

“As a student of Alan Blinder, Larry Summers, and Stanley Fischer, I was trained to view the short-run effects of fiscal policy through the lens of Keynesian macroeconomic theory. I am sure that many of the economists in the new Obama administration share that intellectual framework. After all, they are being drawn from my teachers (Larry Summers), my fellow students (Christina Romer), and my own students (Jason Furman).

Many macroeconomists, however, are skeptical of the Keynesian model.”

 

SKEPTICAL??? THAT COMES UNDER THE HEADING OF NOT GOOD ENOUGH. We will find that by sloppy thinking. By failure to differentiate between real and nominal GDP and most of all by the failure to adopt George Reismans Gross Domestic Revenue model, that Greg goes way off course here.

 

“…..And even among modern Keynesians, there is disagreement about specifics. I think it is fair to say that short-run business cycle theory remains one of least settled parts of economics. Any economist approaching the subject should bring an ample dose of humility…..”

YOU ARE RIGHT TO BE HUMBLE GREG.

 

“…..(The alternative is a surfeit of hubris–a character trait all too common among economic commentators.)
The Keynesian model has some clear, practical insights about how to think about fiscal policy during economic downturns. But are those insights true?

One approach to answering this question is to examine the data using the techniques of time-series econometrics without imposing much a priori theory. For monetary policy, there is a large literature that does this; for fiscal policy, the literature is smaller but growing. The results from this exercise, however, do not always confirm the predictions from textbook Keynesian models.

For example, here is the conclusion of Andrew Mountford and Harald Uhlig (a prominent econometrician now at the University of Chicago) in an empirical study called “What are the Effects of Fiscal Policy Shocks?“:

Our main results are that

 

  • a surprise deficit-financed tax cut is the best fiscal policy to stimulate the economy
  • a deficit[-financed government] spending shock weakly stimulates the economy.
  • government spending shocks crowd out both residential and non-residential investment without causing interest rates to rise.”

 

THESE FINDINGS DO INDEED GO AGAINST THE KEYNESIAN MODEL. BUT IN FACT NO INCREASE IN AGGREGATE SPENDING IS PERFORMED BY THE TAX CUT EITHER. RATHER WHAT HAPPENS IS SPENDING IS SHIFTED AROUND SO THAT IT MAY BE COUNTED IN GROSS DOMESTIC PRODUCT. WHEN THE ALLEGED STIMULUS IS COMING FROM EXTRA GOVERNMENT SPENDING THE RESOURCES ARE TAKEN DIRECTLY OUT OF BUSINES TO BUSINESS SPENDING AND APPEAR IN GOVERNMENT EXPENDITURE SO ARE NOW VISIBLE TO KEYNESIANS. AND SINCE GOVERNMENT EXPENDITURE CANNOT LEAD TO HIGHER PRODUCTIVITY AND CHEAPER GOODS WHEN WE CHANGE FROM NOMINAL TO REAL GDP THE STIMULUS (IN REALITY NON-EXISTENT) IS DEEMED TO BE LESS.

WHAT HAPPENS WITH TAX CUTS IS ENTIRELY DIFFERENT. SOME OF THE SPENDING WILL COME OUT OF BUSINESS TO BUSINESS SPENDING. BUT TAX CUTS WILL ALSO LEAD TO SOME OF THAT BEING PUT BACK VIA GREATER REINVESTMENT AND RESOURCES COMING FROM OVERSEAS. HENCE WHEN WE ADJUST FROM REAL TO NOMINAL GDP INCREASE THE STIMULUS WILL APPEAR TO BE POWERFUL. BUT THERE IS NO STIMULUS AT ALL. ITS JUST A THIRD-RATE KEYNESIAN MAGIC TRICK. THE INTELLECTUAL SLOPPINESS SIMPLY COMES FROM FAILING TO SEE WHERE THE SUPPOSED EXTRA SPENDING IS COMING FROM AND FAILING TO CLEARLY SEE THE DIFFERENCE BETWEEN REAL AND NOMINAL GDP.

THE WHOLE THING IS CLEAR A PRIORI IN ADVANCE.

“These finding are not consistent with standard Keynesian theory, according to which government spending multipliers are larger than tax multipliers and crowding out occurs through increases in interest rates.

An earlier, related paper by Olivier Blanchard and Roberto Perotti called “An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output” reported similar anomalous results:

we find that both increases in taxes and increases in government spending have a strong negative effect on private investment spending. This effect is consistent with a neoclassical model with distortionary taxes, but more difficult to reconcile with Keynesian theory: while agnostic about the sign, Keynesian theory predicts opposite effects of tax and spending increases on private investment. This does not appear to be the case.

 

Blanchard, incidentally, is now the chief economist at the IMF.

I am not sure how convinced I am by these findings. And even if they are correct, I am not sure what model I should use to explain them and to what extent that model would apply to the extraordinary economic circumstances we now face. At the very least, these puzzles should give us reason to pause when using the Keynesian framework for policy analysis. There is still a lot about macroeconomics that remains deeply puzzling.”

 

ONCE YOU KNOW WHATS GOING ON THE REST OF GREGS COMMENTS ARE MEANINGLESS AND NOT REQUIRING OF FURTHER ELUCIDATION FROM ME.

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Responses

  1. Interesting points GB. A small literary critique…all caps makes it harder to read.

    I do like you analysis at “”WHEN THE ALLEGED STIMULUS IS COMING FROM EXTRA GOVERNMENT SPENDING THE RESOURCES ARE TAKEN DIRECTLY OUT OF BUSINES TO BUSINESS SPENDING AND APPEAR IN GOVERNMENT EXPENDITURE SO ARE NOW VISIBLE TO KEYNESIANS.””

    However, I have not found your analysis of the first Bush tax cut in the US. It was known a priori that manufacturing was not investing because plant capacity was under utilized. Bush tax breaks were to stimulate in a trickle down model assumption. It was mainly a failure. With the fiscal policies of Afganistan and Iraq combined with the tax cuts to consumers, do you see the economic mishap of the US in 2008 a replay and confirmation of the findings
    “”a surprise deficit-financed tax cut is the best fiscal policy to stimulate the economy
    a deficit[-financed government] spending shock weakly stimulates the economy.
    government spending shocks crowd out both residential and non-residential investment without causing interest rates to rise.”

  2. Surprise has nothing to do with it. Its incredible the sort of voodoo that people believe in that its got to be a surprise. Rational expectations an all that. Irrelevant to what we are talking about.

    Yes I remember the Bush tax cuts. I remember that in the very next quarter after the Bush tax cuts the GDP growth rate shot up to an annualised rate of 8% per year rivalling China.

    Now tax cuts are always going to be good. But not because they STIMULATE aggregate spending. Only new money can do that in a predictable way. They are good because its like getting a piano off your back.

    On top of that real growth in productive power can only come from a sort of comprehensive renovation of business that ought to also be integrated with a lengthening of the structure of production. But this sort of thing takes time. And it also takes funds. So really we have to see that 8% in the next quarter as a bit of a fiction. And mostly just consumer spending kicking in for half of it and the other half probably a bit of a lot of different factors. People working a little bit harder, some extra reinvestment. But anyone ought to have seen that this 8% in the very next quarter was pretty fishy.

    Going back further to the Reagan tax cuts. They cut the top rate and most rates from really punishing levels. And at the same time they had accelerated depreciation allowable. To me that was more successful. Because basically all these businesses had to retool. The accelerated depreciation virtually mandated that they retool. I see technology as integrated with capital update. Hence I see that particular tax cut as a time when the Americans leapt ahead of the competition in technological prowess.

    Before that we had all thought that the West Germans and Japanese had pretty much caught them. But I think the Americans pulled ahead again in technology after that. And perhaps we only had the mindset that they had done so once it came to the first Gulf War.

    With George the younger there wasn’t even the will to attempt to cut spending and veto anything. Reagan vetoed constantly in his first term. George mystified all the rest of us because it was as if his veto arm was broken in three places.

    So yes I think his tax cuts were good. But he simply didn’t follow through with using all his powers to discipline the big spenders.

    The other thing though is since its business-to-business spendin, thats where its at, to my mind you can put the really rich somewhat on the backburner. You want to be lifting the tax-free-threshold and having tight money (not right now but normally) and getting rid of business taxes. So that every subcontracter finds it easy to accumulate the best gear. So anyone in business can hoard gear like Smorg.

    There is a lot of talk about getting down the top rates and I understand that. But to me its more offensive to have a subcontracter paying 15% company tax on his retained earnings then it is for a bigshot executive to have to pay 30% for that part of his salary above $200 000.

    We want networked business with high productivity, as a result of business, big and small, accumulating the best and latest gear….. and if that latest gear is outside their budget then being able to get gear secondhand from those who are accumulating the best and latest gear.

    No small business ought to even pay fifty cents on the money he’s reinvested into his business. It might be thought that spending so much within the business might lead to lack of discrimination and wastefulness. But hard money will take care of that. And since no small business ought to have to pay tax on anything but drawings it stands to reason that tax free thresholds ought to be high and there ought to be no tax on profits whatsoever. Taxing profits is a sin. Its bad even from a thieving point of view. Its unintelligent thieving.

    You see what happened in the traditionally poor Ireland. In that it was the South, the Republic, and overwhelmingly Catholic and thought traditionally to be pretty hopeless. But somewhere not long ago they had themselves a mind to have the lowest company taxes around and their act just took off and they never looked back. And its all open for us to explode in our growth if we are willing to slash spending ruthlessly, get rid of the company tax and have hard 100% backed money.

  3. Right I see what you are really enquiring about:

    “It was known a priori that manufacturing was not investing because plant capacity was under utilized. Bush tax breaks were to stimulate in a trickle down model assumption. It was mainly a failure.”

    Right I can tell you exactly whats going on with that. If your reinvestment rates and savings rates are low and your governments are spilling red ink everywhere then your manufacturers will be hurt.

    We can get this from trade economics.

    The analysis starts from the fact that the balance of payments always balances. Which means that if a country lends more than it borrows it will export more than it imports.

    And if a country borrows more than it lends than it will import more than it exports. Hence the Bush tax cuts were in fact a failure from that point of view. Because they were tax cuts and not spending cuts. And because they didn’t lead to higher savings rates, budget surpluses, and higher business reinvestment rates.

    Or at least they didn’t lead to ALL OF THE ABOVE.

    Manufacturing is damaged by bad monetary policy. But its also going to be damaged by government debt, low savings rates, low reinvestment rates.

    So the above is a more direct answer to your question.

  4. OK, it appears that we agree. In the US, Republicans claim to be conservative. The problem with the Republicans is that when it came to taxing, they correctly stated that unless it taxes the middle class, the monies cannot be had. Not a problem for me as long as you assume 1. that you need the monies, and 2. that taxes are the best way. HOWEVER, when they cut taxes, they did it for the rich even though they were using tax cuts as a monetary policy. Thus, their cuts were not as effective as the cuts should have been, since by their own admissions tax cuts are most effective in getting rid of taxes (In the US that means reducing taxes for the middle income groups.). They gave the tax cuts to the rich preferentially. Also, they gave tax breaks to business even though the breaks they gave were already maxed out. They gave the tax breaks to rich and businesses that did not need them to placate their political base.

    • Well giving tax breaks to business is OK and not bad for the less well off.

      It goes like this. Supposing there is extra government spending. This is extra spending but not of a sort that leads to cost-of-goods-sold.

      But supposing there is extra business-to-business spending? All extra business-to-business spending becomes cost-of-goods sold in the next time period. When people save that savings is relent into business-to business spending and that becomes cost-of-goods sold down the track.

      So business profits equals business revenues minus cost of goods sold.

      So what happens is this. If they cut taxes and run big deficits that increases the before tax profit level. And the after tax for that matter. Deficit spending increases the profit share of the economy. Had they made business tax zero, not cut taxes to the rich, lifted the income tax free threshold, ran surpluses, taken the interest earnings tax off, and had tight money, the rich would be still paying pretty solid taxes but profit levels would have been low. Since wages are paid out of business-to-business spending then the wages share of the economy would have been higher. And monetary growth adds to nominal profit by roughly the percentage of monetary growth. Plus in doing so it also allows more dividends and higher salaries that also wind up boosting profits.

      So you see capitalism isn’t necessarily a situation where these big-shots have it easy. The contrary can be the case. But taxes on retained earnings are always bad for your average Joe and they ought not be entertained at any time.

  5. Sorry, forgot to state that the tax breaks were for capital investments. B2B is taxed except for capital investments.

    Taxes are deferred for longterm investment earnings in government approved plans (of course).

  6. Right. Well that might seem on the face of it a bit of a gyp. But consider the situation of hard money. Under 100% backed commodity money you’ve got to be doing a magnificent job to make a capital gains. Whereas of course with fast monetary growth anyone can make capital gains. So capital gains tax is a really bad tax but then its understandable that it seems fair if there is monetary growth about the place.

    But if we are talking the historical rather than the theoretical, well sure the set up would appear to be pretty righteous for the already rich.

    • “The next step for the Fed is to drop the “price stability” rhetoric. The Fed has never been truly committed to stable prices. After all, inflation during the Volcker-Greenspan era averaged about 2 to 3 percent. The Fed could have lowered inflation to zero if it had wanted. Now that zero, or even below zero, is a possibility, the Fed needs to convince people that we are going back to the normal inflation rate of 2 to 3 percent.

      Let me suggest this wording for the Fed’s next press release:
      The Committee recognizes that moderate inflation would be desirable under the present circumstances. In particular, the overall level of prices a decade hence should be about 30 percent higher than the price level today. The committee anticipates keeping the stance of monetary policy sufficiently accomodative to achieve that degree of inflation over the coming decade.”

      Macromancy from this alleged pro-free-enterprise type. This would just continue with the horrible damage to spending decisions and capital markets. This is real voodoo. Real superstition here. Two and three per cent consumer price inflation will imply enourmous monetary inflation hence a great deal of damage to the society. Yet this is a fellow that many Australian economists, who pretend to be libertarian… well they hang off this fellows every paragraph.

  7. It has been generally accepted that the political costs of less than 2% inflation in terms of unemployment and government welfare support are unacceptable. To politicians.

  8. Right. But there are reasons that people came to that conclusion. You are being too generous. You know full well that inflation less than that. was proved to be punishing to the rest of us too in the 80’s.

    They call is Sado-monetarism. Or if they didn’t they ought to have. But its a feature of fractional reserve fiat. That when the attempt was made (particularly by the NewZealanders) to lower consumer-price-inflation below that level it hurt too much. It hurts. Not just the politicians but people everywhere. And particularly rural people.

    Whole towns started closing down that ought to have been viable. Fractional reserve makes us all liquidity-junkies. The monetarists thought they could do things on the basis of national monetary aggregates. They thought that they didn’t need to bite the bullet and stand up to the fractional reserve religionists.

    But bank-cash-pyramiding disproportionately favours those areas where land appreciation is already on the fly. Hence fractional reserve with zero consumer-price-inflation is likely to have money exploding all over the place in Aucklands Remuera Road and yet up in Kawa Kawa people can be universally skint and the shops almost ready to close down until next welfare cheque day.

    So Milton Friedmans monetary prescription didn’t pan out as planned. And its just fractional reserve that is the problem, and always will be a problem, and there is no mitigating it, but we need to be rid of it in all its forms and no double-talk jive from the macromancer end of town.

    Once we are quits with fractional reserve it is no problem to have prices falling all the time. So long as Gross Domestic Revenue isn’t falling and is growing very slowly. Growing very slowly without falling.

    The other thing is that the people who were attempting to go for 0 consumer price inflation (most particularly the NewZealanders) were playing golf in the dark. They did not know when their policy was causing Business-to-Business spending to crash since no-one compiles the figures.

    If they are working with consumer price inflation and Gross Domestic Product it is only normal that a central bank targeting 0 consumer price inflation is going to habitually destroy Business-to-business spending. Not just occasionally but habitually. And with fractional reserve even when they are not destroying this spending nationally they will be doing it locally.

  9. The hurt that you describe for the rural areas has an assumption that I think needs exploring. You state that they should have been viable. Is that a supportable conclusion, or is it that they are inefficient and what you are seeing is an adjustment to economic balance and reality?

  10. Well we need empirical verification for all things. It seems really obvious with the model I got going in my head but thats hardly science. If we put a tail on where money changed hands and was created and we kept on seeing new money or even old money circling back to big-city real estate investment or big-city infrastructure investment then that might be a partial verification.

    I really wonder if the size of our cities isn’t based on fractional reserve and non-user-pays infrastructure. I really do. Its not such an old institution to be having these multi-million people cities. I don’t think that they will be with us always. Look at Athens. Maybe 40 000. That was a good size for a town up until very recently.

    When we went for hard money in this part of the world Australia and New Zealand, though on the surface very similar were actually quite different. Whereas Australia was one of the most urban countries in the developed world, New Zealand was one of the most rural. And New Zealand got the stuffing kicked out of it whereas Australia handled matters much better. But if you look at that time places like country Victoria got the bejeesus beaten out of them too.

    My town had lots of dairy and especially heaps of forestry associated with it. But not a great deal of a chance for land appreciation when the sado-monetarism hit. And we got the stuffing completely kicked out of us. Well thats no scientific survey by any means much as it appears so clear to me.

    I guess what I’m best at doing is generating topics for PHD students to follow up on. I really envy those guys.

  11. The counter-case might be that we didn’t have the wharf facilities that would have generated the potential for the growth that came from globalisation that was going on at the same time. So we took the hit but weren’t in the position to take the benefits also. A few really good mini-container wharves might have gotten some Japanese investors interested in more factories there. They had a paper-pulp mill or something put in after I left. I’d have to verify it. I know it was a Japanese venture. Maybe that could have made a lot of difference. One wants to put the contrary possibilities.

  12. GB said “The counter-case might be that we didn’t have the wharf facilities that would have generated the potential for the growth that came from globalisation that was going on at the same time. ”

    This was where I was leading. Cities have an economy of scale for services especially. Fractional reserve does help the city scale economy rather than rural. However, “economy of scale” is a nice way to describe efficiencies. The other point I was alluding was the nature of taxes. Use your conditions of hard money and low growth. In that governments tend to aggregate in the cities and expend monies in the cities, a form of political efficiency, the net flow of money would be to the cities due to their efficiencies of scale and political efficiencies (Using analysis as simplistic as Marx, I know). The point of the analysis is agreement with your comment of proper metrics, properly measured. Several times in history hard money was tied to variables such as tobacco, salt, wheat, corn, etc. The difference in the city based fractional reserve system is that housing though the price varies is a “hard” asset. So using your definitions, if you expand the definition (land can be traded for goods, or worked for profit, same as money) of “hard”, you should be able to develop a better metric.

    • Right. Interesting. So I was thinking the growth of cities might have been helped with fractional reserve and non-user-pays infrastructure. But then from what you say it makes me think its probably wider than that. And its likely wrapped up in the rise of the modern state itself.

      “Cities have an economy of scale for services especially. Fractional reserve does help the city scale economy rather than rural. However, “economy of scale” is a nice way to describe efficiencies.”

      I’m sure thats right but to me its gone too far. Gone beyond economies of scale. To me if you had a pretty good wharf for containers, a road and rail link, and a really built up CBD you could have an efficient setup with maybe a couple of hundred thousand. But everywhere you go there are these height restrictions on buildings. The smaller towns are so dogged with that and the restrictions are only lifted when there are so many people and no-one gives a toss anymore. Its like seige warfare by the locals to prevent the buildings in town going up and up. To my mind a really efficient setup is downtown Gotham surrounded by semi-rural setups rather than the suburbs. Poor people in what would be today impossibly spacious sky-houses in town looking down on hobby-farms and Estates. Plenty of buffer-zones and throughways around the fenced off land so you can be out of Gotham on your trailbike and be free of puny humans in no time flat. Or even just ridiing a curved path out of there on your horse.

      Rothbard reckoned that natural rights were universal but they have to be enforced only locally. But if there is any compromise with that in a working federalism one of the things I would think is no good for the locals to do is ever put height restrictions on buildings. I see this as one of the most anti-social acts. And I see this as one thing preventing the economy of scale in services you are talking about, being a doable thing in a much smaller city.

      Plus I think about nuclear warfare a lot. Gotham is a tight, small area and so can be shielded and the people in the semi-rural surroundings all have basements spare rooms to burn. Contrary to what people think nuclear war is likely to be protracted in many cases. It could go on for years. We here in Australia are so horribly weak in many ways. Its the above setup that I would be going for. Because if you are in a position to slog it out indefinitely then thats not a war that the other guy is wanting to get off the ground.

  13. If nuclear war is protracted, it will be about vengence and residual capabilities. There was a study that showed with as few as 5 mega nukes, you could separate the east from the west and kill most of the public communications and transcontinental flow of goodsof the USA. With 12, one could quadrant the USA.

    “”To me if you had a pretty good wharf for containers, a road and rail link, and a really built up CBD you could have an efficient setup with maybe a couple of hundred thousand.”” I find this similar to if you build it, they will come. I think the best analogy is to view the city as a simle colonial type animal. There are certain shapes and necessary transport that give the animal its competitive advantage. Take the one about the wharf. This is an excellent way to get cheap farm goods to a concentrated area. The different markets can freely purchase and sell at their micro niched monoploies radiating from the wharf. This implies, a system of transport and communication. This type of simplistic economy is already taxing the limits of a socialist system. The only way to have efficiencies is to use the free market system to provide the communication and feedback that will be self-regulating per the laws, codes, and self interest of the population. So even if the wharf is a good mechanism for helping distribute goods. How was it developed? Was it by a far off socialist committee, or did it grow from a capital investment from local farmers needing a cheap way to transport and distribute goods?

  14. add comment moderation to your blasphemy blog, fool…

    engforum.pravda.ru/showthread.php?t=280780

    Einstein puts the final nail in the coffin of atheism…

    *************************************

    youtube.com/watch?v=V7vpw4AH8QQ

    *************************************

    atheists deny their own life element…

    LIGHT OR DEATH, ATHEISTS?

    ********************************
    ***************************LIGHT*********
    ************************************

  15. But Einstein will be overturned. So where does that leave you?

    I mean right about now I can see so many boneheads who are atheists. But this cannot be used as evidence for the existence of God. They are just stupid that way right now. I cannot explain it.


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