Comments on Jessica Irvine “Swan proved Keynes works but can he avoid Keynes's curse?”, 13/04/2011, http://www.smh.com.au/opinion/politics/swan-proved-keynes-works-but-can-he-avoid-keyness-curse-20110412-1dcis.html
While there may indeed be Keynes's curse in a logic sense, but it is the real political economy of most government budgets that cause more grieves and cynics.
It is not the inevitable wastage of most government fiscal stimulus measures, but the stupid, sometimes deliberate and politically driven wastages that are the problem for the public.
For example, there have been so many examples of wastes shown in the BER programs. Further, the restrictions for the BER projects for each and every school to be either school hall or library were so problematic, because that is another form of wastage (it is not the best outcomes or the most effective projects for many schools and they could have been better off if they had been allowed to build what they need most) that could and should have been avoided.
The home insulation programs are another example. Why didn’t the government anticipate the potential risks and problems in advance and take measures to minimise them is beyond anyone’s belief?
On that account, Swan will not be able to avoid the crudest Keynes's curse due to those silly designs of the government policy and poor implementations.
Most economist students will be shocked to realise that the real world fiscal policy design in terms of its content is nothing like what they were taught from the textbook – a government that always acts with a good intention to achieve good fiscal policy objectives.
Welcome to the real world, at last.
Showing posts with label Keynesian. Show all posts
Showing posts with label Keynesian. Show all posts
2011-04-13
2010-08-30
Economic theories and economic policies
Comments on Tony Makin “Saddled with legacy of fiscal extravagance”, 30/08/2010, http://www.theaustralian.com.au/national-affairs/saddled-with-legacy-of-fiscal-extravagance/story-fn59niix-1225911594527
While the argument of fiscal extravagance is correct, it is problematic to use the point that "in mainstream macro-economics, arguments in favour of using activist monetary policy, conducted under the auspices of more independent central banks, have dominated arguments for deploying activist fiscal policy", as the support against fiscal extravagance.
Even that point was correct in actual policy effectiveness (it is doubtful at the best) in normal circumstances, the nature of the GFC should question the generality of that point in the wake of the GFC.
Any economists, especially those who prescribe to actual policies, need not to be ideological in theories and need to take into account the differences between the assumptions in a theory and the real world conditions and take a pragmatic approach to policies.
Stiglitz, a strong Keynesian, is probably wrong in his judgement about the appropriateness of Australia’s fiscal policies in the wake of the GFC, some strong monetarists have been also wrong in continue to use the argument against any use of fiscal policy as a tool to deal with the GFC.
Both sides of the macro economists need to be realistic enough to realise some of their views may be wrong or incorrect sometimes!
While the argument of fiscal extravagance is correct, it is problematic to use the point that "in mainstream macro-economics, arguments in favour of using activist monetary policy, conducted under the auspices of more independent central banks, have dominated arguments for deploying activist fiscal policy", as the support against fiscal extravagance.
Even that point was correct in actual policy effectiveness (it is doubtful at the best) in normal circumstances, the nature of the GFC should question the generality of that point in the wake of the GFC.
Any economists, especially those who prescribe to actual policies, need not to be ideological in theories and need to take into account the differences between the assumptions in a theory and the real world conditions and take a pragmatic approach to policies.
Stiglitz, a strong Keynesian, is probably wrong in his judgement about the appropriateness of Australia’s fiscal policies in the wake of the GFC, some strong monetarists have been also wrong in continue to use the argument against any use of fiscal policy as a tool to deal with the GFC.
Both sides of the macro economists need to be realistic enough to realise some of their views may be wrong or incorrect sometimes!
2010-06-15
Keynesian not dead but require discretion
Comments on Michael Stutchbury “Crisis puts nails back in Keynesian coffin”, 15/06/2010, http://www.theaustralian.com.au/business/opinion/crisis-puts-nails-back-in-keynesian-coffin/story-e6frg9p6-1225879617867
Frequent interventions by governments in terms of fine tuning the economy in the tradition of Keynesian may not be desirable, given government's ability and capability to get things right, as well as political problems and constraints.
That, however, does not mean Keynesian should be completely abandoned altogether and never be used, such as the case in the wake of the GFC where there was a clear case that prudent government interventions can outweigh the costs of those actions.
It seems that Keynesian should be used for two main purposes. Firstly, it should be used in an emergence or a crisis where market would take too long to correct itself and restore broadly appropriate macroeconomic settings.
Secondly, it may be used for purposes of media and longer term structural adjustment, as opposed to deliberate counter cyclic fiscal policy beyond its autonomous stabilising effects.
If a government has the ability to fine tuning, then it could also conduct counter cyclic fiscal policy, but it is generally much harder and requires much higher policy design and implementation capacity by the government and the bureaucracy working perfectly in close cooperation.
Frequent interventions by governments in terms of fine tuning the economy in the tradition of Keynesian may not be desirable, given government's ability and capability to get things right, as well as political problems and constraints.
That, however, does not mean Keynesian should be completely abandoned altogether and never be used, such as the case in the wake of the GFC where there was a clear case that prudent government interventions can outweigh the costs of those actions.
It seems that Keynesian should be used for two main purposes. Firstly, it should be used in an emergence or a crisis where market would take too long to correct itself and restore broadly appropriate macroeconomic settings.
Secondly, it may be used for purposes of media and longer term structural adjustment, as opposed to deliberate counter cyclic fiscal policy beyond its autonomous stabilising effects.
If a government has the ability to fine tuning, then it could also conduct counter cyclic fiscal policy, but it is generally much harder and requires much higher policy design and implementation capacity by the government and the bureaucracy working perfectly in close cooperation.
2009-11-03
Phelps on economic opposites - Keynesian and neoclassical
Edmund Phelps is a outstanding economist and has contributed to the expectations theories. His analysis of intertemporal tradeoffs in macroeconomic policy is the prime reason for his Nobel Prize in economics.
He has a comments on what he calls the economic opposites: Keynesian economics and the neoclassical equilibrium theory.
He says: "In the theory wars, which are as much wars over policy choices, two very bad kinds of theories are driving out good theories."
One very interesting point Phelps makes is about the cause of the great financial crisis:
"The most profound fallacy is the newfangled idea that misalignment of incentives in banks caused the housing bubble – a bubble that, when it burst, shook the economy to its foundations. All can agree that increased lending and building ran into the awkward fact that costs increase when production is stepped up. On that account, prices sought a higher level. But that analysis does not capture the steep four-year climb in housing prices, which rose by more than 60 per cent.
To account for so large an increase, we have to recognise that expectations played a role. Speculators appear to have expected that housing prices would go sky-high, so prices took off and then went on climbing in anticipation that those high prices were getting closer. The banks, seeing the houses offered as collateral were worth more and more, responded by supplying an increasing flow of mortgage loans.
From this viewpoint, speculation drove the crisis. Misaligned incentives were not sufficient to do it – and not necessary either. Bubbles long predate bonuses. The crisis could have happened with a 1950s financial sector. The lesson the crisis teaches, though it is not yet grasped, is that there is no magic in the market: the expectations underlying asset prices cannot be “rational” relative to some known and agreed model since there is no such model."
See Edmund Phelps "A fruitless clash of economic opposites", 2/11/2009, http://www.ft.com/cms/s/0/f71cfc6a-c7e6-11de-8ba8-00144feab49a.html
He has a comments on what he calls the economic opposites: Keynesian economics and the neoclassical equilibrium theory.
He says: "In the theory wars, which are as much wars over policy choices, two very bad kinds of theories are driving out good theories."
One very interesting point Phelps makes is about the cause of the great financial crisis:
"The most profound fallacy is the newfangled idea that misalignment of incentives in banks caused the housing bubble – a bubble that, when it burst, shook the economy to its foundations. All can agree that increased lending and building ran into the awkward fact that costs increase when production is stepped up. On that account, prices sought a higher level. But that analysis does not capture the steep four-year climb in housing prices, which rose by more than 60 per cent.
To account for so large an increase, we have to recognise that expectations played a role. Speculators appear to have expected that housing prices would go sky-high, so prices took off and then went on climbing in anticipation that those high prices were getting closer. The banks, seeing the houses offered as collateral were worth more and more, responded by supplying an increasing flow of mortgage loans.
From this viewpoint, speculation drove the crisis. Misaligned incentives were not sufficient to do it – and not necessary either. Bubbles long predate bonuses. The crisis could have happened with a 1950s financial sector. The lesson the crisis teaches, though it is not yet grasped, is that there is no magic in the market: the expectations underlying asset prices cannot be “rational” relative to some known and agreed model since there is no such model."
See Edmund Phelps "A fruitless clash of economic opposites", 2/11/2009, http://www.ft.com/cms/s/0/f71cfc6a-c7e6-11de-8ba8-00144feab49a.html
2009-09-27
A useful reading about Keynes and Keynesian
This is a very useful article to read: Andrew Leonard "Don't call it a comeback", 26/09/2009, http://www.businessspectator.com.au/bs.nsf/Article/Salon-pd20090924-W76RH?OpenDocument&src=sph See also: Salon.com
It is about the resurgent Keynesian in the wake of the crisis and the great recession. It mentioned a book, as the following paragraph says:
Few people are better situated to comment or explain Keynes' current fashionableness than Lord Robert Skidelsky, author of the newly published Keynes: The Return of the Master – which comes complete with the possibly overdone sub-headline: "Why, Sixty Years After His Death, John Maynard Keynes is the Most Important Economic Thinker for America".
It touches on the other side of Keynes that has rarely been seen by many, as the article's concluding paragraph says:
If Keynes were alive today, these would be questions he would be asking. And after reading Keynes: The Return of the Master, one can only conclude that we would be well-served to have him out and about, confounding the status quo with his impertinence.
It is about the resurgent Keynesian in the wake of the crisis and the great recession. It mentioned a book, as the following paragraph says:
Few people are better situated to comment or explain Keynes' current fashionableness than Lord Robert Skidelsky, author of the newly published Keynes: The Return of the Master – which comes complete with the possibly overdone sub-headline: "Why, Sixty Years After His Death, John Maynard Keynes is the Most Important Economic Thinker for America".
It touches on the other side of Keynes that has rarely been seen by many, as the article's concluding paragraph says:
If Keynes were alive today, these would be questions he would be asking. And after reading Keynes: The Return of the Master, one can only conclude that we would be well-served to have him out and about, confounding the status quo with his impertinence.
2009-08-26
Economics needs to address economic issues and problems
Comments on Tony Makin “We keep repeating Keynes's mistakes”, 26/08/2009, http://www.theaustralian.news.com.au/story/0,25197,25981707-5015664,00.html
Tony Makin's argument may be more relevant to the current Australian case where the aggregate demand may not have fallen too much and interest rates are not zero and monetary policy is still effective. However, it is a step too far to say the same thing to the current US case and possibly the UK case.
While the consistency in microeconomics is nice in theory, but that theory is based on some assumptions that may not always hold and therefore while the consistent theory always works in theory, it can fail the reality. When it fails seriously, generalised Keynesian theory can help. To deny that is just like to say that the air is always pure and there is no virus in it.
Economics is not just for the sake of a nice and consistent theory. Its main usefulness is to solve economic problems. Anyone who does care the reality will always find difficulties with some not so elegant but actually workable alternatives.
Theoretic ideology alone is insufficient to addressing real economic issues and challenges. Unfortunately, different theoretic ideologies are extremely strong in economics. That is a pity.
Tony Makin's argument may be more relevant to the current Australian case where the aggregate demand may not have fallen too much and interest rates are not zero and monetary policy is still effective. However, it is a step too far to say the same thing to the current US case and possibly the UK case.
While the consistency in microeconomics is nice in theory, but that theory is based on some assumptions that may not always hold and therefore while the consistent theory always works in theory, it can fail the reality. When it fails seriously, generalised Keynesian theory can help. To deny that is just like to say that the air is always pure and there is no virus in it.
Economics is not just for the sake of a nice and consistent theory. Its main usefulness is to solve economic problems. Anyone who does care the reality will always find difficulties with some not so elegant but actually workable alternatives.
Theoretic ideology alone is insufficient to addressing real economic issues and challenges. Unfortunately, different theoretic ideologies are extremely strong in economics. That is a pity.
2009-06-05
Economists debate - interesting but not necessarily always productive
Comments on Richard Pomfret “Too soon for obituaries: economics is alive and (reasonably) well”, 4/06/2009, http://www.eastasiaforum.org/2009/06/04/too-soon-for-obituaries-economics-is-alive-and-reasonably-well/
Although I studied some economics, my economics is really rusty. So to engage in a debate among professional economists, especially academics, is a little over reach for me. It seems that all the people on both sides can be supervisors for me to do another PhD in economics (and one was actually my supervisor when I did one in the early 1990s, although I won’t say who). But I am encouraged by the ongoing economic crisis and may act like a venture economist (capitalist) in the debate. Forgive me if I am too naïve or wrong.
It is probably a fact and normal to have economists who may often disagree among themselves. In fact, some jokes on economists include one like that if you have N economists in a room you may have N or more different opinions.
Some economists tend to develop their own new theories (and some may withstand tests) by killing or wounding existing theories. Yes, it is perfectly normal to find the shortcomings of existing theories to progress and advance. But history of economics appears to suggest that the birth of new theories do not necessarily mean the death of existing ones. They may all live and thrive well under particular conditions, that is they may have their usefulness and suitable for some cases.
There have been debates between monetarists and Keynesians. The rational expectations revolution in the 1970s produced the famous result of policy ineffectiveness. But when times of crises, policy makers have no other tools but the two main ones: fiscal and monetary policies, though expectations have become an important part in modelling.
From these limited (but fairly famous ones) episodes of economics, it is not too difficulty to see that both monetary and fiscal policies as well as expectations, both rational and adaptive are useful. It is seldom the case in economics that one theory will always replace another, irrespective whether the proponents of new theories may tend to say otherwise.
So let’s move beyond formalities, though useful they may be, and focus on advancing economics. If the debate can provide some new useful insights into the current economic crisis, it will be good. It will be even better if some policy solutions can be found in the process.
Although I studied some economics, my economics is really rusty. So to engage in a debate among professional economists, especially academics, is a little over reach for me. It seems that all the people on both sides can be supervisors for me to do another PhD in economics (and one was actually my supervisor when I did one in the early 1990s, although I won’t say who). But I am encouraged by the ongoing economic crisis and may act like a venture economist (capitalist) in the debate. Forgive me if I am too naïve or wrong.
It is probably a fact and normal to have economists who may often disagree among themselves. In fact, some jokes on economists include one like that if you have N economists in a room you may have N or more different opinions.
Some economists tend to develop their own new theories (and some may withstand tests) by killing or wounding existing theories. Yes, it is perfectly normal to find the shortcomings of existing theories to progress and advance. But history of economics appears to suggest that the birth of new theories do not necessarily mean the death of existing ones. They may all live and thrive well under particular conditions, that is they may have their usefulness and suitable for some cases.
There have been debates between monetarists and Keynesians. The rational expectations revolution in the 1970s produced the famous result of policy ineffectiveness. But when times of crises, policy makers have no other tools but the two main ones: fiscal and monetary policies, though expectations have become an important part in modelling.
From these limited (but fairly famous ones) episodes of economics, it is not too difficulty to see that both monetary and fiscal policies as well as expectations, both rational and adaptive are useful. It is seldom the case in economics that one theory will always replace another, irrespective whether the proponents of new theories may tend to say otherwise.
So let’s move beyond formalities, though useful they may be, and focus on advancing economics. If the debate can provide some new useful insights into the current economic crisis, it will be good. It will be even better if some policy solutions can be found in the process.
2009-05-31
Max Corden too biased on the debate of fiscal stimulus
Comments on Current Account Blog “Corden on fiscal stimulus”, the Australian, posted by David Uren, 27/05/2009, http://blogs.theaustralian.news.com.au/currentaccount/index.php/theaustralian/comments/corden_on_fiscal_stimulus/
Some economists are renowned for their ideological approaches to economic policies. Corden has just provided a perfect example recently.
Corden, I suspect, must be, or at least now sounds to be a Keynesian. He is too biased in his analysis of government stimulus to counter criticisms over reckless fiscal spending disguised or misdirected as fiscal stimulus.
He said there are two flaws in the notion that fiscal stimulus now will leave future generations worse off. He said for the fhe first one as follows:
“First, there is the total value of the bonds (and equities) acquired by the savers as the result of the rise in incomes brought about by the stimulus. These are assets, and it has been shown that their value is equal to the bonds issued by the government to finance the stimulus, which are the taxpayers liabilities.”
“Hence, there is a set of assets that exactly offsets the liabilities on which conservative critics of stimulus policies have focused.”
Is Corden correct in the context of countering criticisms? No, unfortunately. This can be easily understood through the following two examples. Example one: what answers one will get, if saying to a family going to face foreclosure of their home that, don’t worry, there are assets that is the total value of loans by the banks that equal to your liability, you should see the value those assets in the society’s balance sheet. The answers may piss off the questioner.
Example two: what answers one will get, if saying to the shop owner who has just been robbed that, don’t worry, there is no loss to the society as a whole, since there are gains to those robbers the same value equal to your loss. Surely the questioner will be pissed off by the answers.
These two example show how ridiculous Corden’s argument is. It is not just the total values that matters. The distribution of those values in the society, or between intergenerations in Corden’s case, that equally matters!
Corden’s second point is to allow the reasonable possibility that there will be positive legacy for the future generations if some of fiscal stimulus as investment turns out to be socially productive. Yes, there is no question that some fiscal investment will be socially productive. On that point Corden is correct. However, the argument is incorrect and wrong in the entirety or totality in the context. To see this point, one only needs to look at what has been happening in Australia’s fiscal stimulus packages over the past six months or so. First, there were the first cash handouts in November last year, proudly labelled by the government as fiscal stimulus. It was a waste, though not completely wasted to be precise, in stimulating the economy to say the least. To say the worst, it was a fiscal bribe. Or one may say it was a complete mess up by an inexperienced Keynesian government.
That was not the end of the matter. In March/April this year, the government has devised its second fiscal stimulus package that included another cash handouts, in the face of mounting evidence that the first one was ineffective in stimulating the economy because a large part of them were saved rather than being spent. To the government’s credit, however, the second cash handouts were a little fairer than the first one, because every taxpayer, except high income ones, would receive a cash handout depending on their taxable income in 2007-08. That was an improvement, a clear improvement. But the intergenerational consequences of inequality are there, the government used future generation’s tax liability to give cash to the current generation.
For Corden’s argument to be creditable, fiscal stimulus needs to be made in such a way, as Corden argued, that the social rate of return of this investment were equal to the rate of interest that applied to the tax liabilities, these two - the tax liabilities and the benefits of first-period public investment would be completely offsetting. Is that reasonably possible in reality? No! The answer is so clear if one looks at the Australian government’s recent proposal of a national broadband network at a proposed cost of $43 billion. There was no feasibility study, no business plan, no economic study, nothing at all. As the minister for finance said, that number was a guestimate, pulled out of the air, because the government feels it is in the national interest to have such a network, to do so. Can you trust anyone who approaches an investment of that magnitude in such a way so the result will be good?
Corden must be living in a very different world of idealistic Keynesian, where not only the government knows all the necessary information, it is also working completely and entirely in the interest of the country, it is so capable in deciding fiscal priorities, so business like approaching to investments. I am afraid that does not exist and Corden must be dreaming.
There is no question that there is a need for fiscal stimulus in the face of a great recession. The debate is not about that need or not. The debate is about what the fiscal stimulus should be and how that should be done, whether it is effective, whether it is done with the minimum costs to future generations. Ideology, whether they are political or economical, is unhelpful to the debate, and unhelpful to getting the stimulus right to lift the economy out of recession.
Some economists are renowned for their ideological approaches to economic policies. Corden has just provided a perfect example recently.
Corden, I suspect, must be, or at least now sounds to be a Keynesian. He is too biased in his analysis of government stimulus to counter criticisms over reckless fiscal spending disguised or misdirected as fiscal stimulus.
He said there are two flaws in the notion that fiscal stimulus now will leave future generations worse off. He said for the fhe first one as follows:
“First, there is the total value of the bonds (and equities) acquired by the savers as the result of the rise in incomes brought about by the stimulus. These are assets, and it has been shown that their value is equal to the bonds issued by the government to finance the stimulus, which are the taxpayers liabilities.”
“Hence, there is a set of assets that exactly offsets the liabilities on which conservative critics of stimulus policies have focused.”
Is Corden correct in the context of countering criticisms? No, unfortunately. This can be easily understood through the following two examples. Example one: what answers one will get, if saying to a family going to face foreclosure of their home that, don’t worry, there are assets that is the total value of loans by the banks that equal to your liability, you should see the value those assets in the society’s balance sheet. The answers may piss off the questioner.
Example two: what answers one will get, if saying to the shop owner who has just been robbed that, don’t worry, there is no loss to the society as a whole, since there are gains to those robbers the same value equal to your loss. Surely the questioner will be pissed off by the answers.
These two example show how ridiculous Corden’s argument is. It is not just the total values that matters. The distribution of those values in the society, or between intergenerations in Corden’s case, that equally matters!
Corden’s second point is to allow the reasonable possibility that there will be positive legacy for the future generations if some of fiscal stimulus as investment turns out to be socially productive. Yes, there is no question that some fiscal investment will be socially productive. On that point Corden is correct. However, the argument is incorrect and wrong in the entirety or totality in the context. To see this point, one only needs to look at what has been happening in Australia’s fiscal stimulus packages over the past six months or so. First, there were the first cash handouts in November last year, proudly labelled by the government as fiscal stimulus. It was a waste, though not completely wasted to be precise, in stimulating the economy to say the least. To say the worst, it was a fiscal bribe. Or one may say it was a complete mess up by an inexperienced Keynesian government.
That was not the end of the matter. In March/April this year, the government has devised its second fiscal stimulus package that included another cash handouts, in the face of mounting evidence that the first one was ineffective in stimulating the economy because a large part of them were saved rather than being spent. To the government’s credit, however, the second cash handouts were a little fairer than the first one, because every taxpayer, except high income ones, would receive a cash handout depending on their taxable income in 2007-08. That was an improvement, a clear improvement. But the intergenerational consequences of inequality are there, the government used future generation’s tax liability to give cash to the current generation.
For Corden’s argument to be creditable, fiscal stimulus needs to be made in such a way, as Corden argued, that the social rate of return of this investment were equal to the rate of interest that applied to the tax liabilities, these two - the tax liabilities and the benefits of first-period public investment would be completely offsetting. Is that reasonably possible in reality? No! The answer is so clear if one looks at the Australian government’s recent proposal of a national broadband network at a proposed cost of $43 billion. There was no feasibility study, no business plan, no economic study, nothing at all. As the minister for finance said, that number was a guestimate, pulled out of the air, because the government feels it is in the national interest to have such a network, to do so. Can you trust anyone who approaches an investment of that magnitude in such a way so the result will be good?
Corden must be living in a very different world of idealistic Keynesian, where not only the government knows all the necessary information, it is also working completely and entirely in the interest of the country, it is so capable in deciding fiscal priorities, so business like approaching to investments. I am afraid that does not exist and Corden must be dreaming.
There is no question that there is a need for fiscal stimulus in the face of a great recession. The debate is not about that need or not. The debate is about what the fiscal stimulus should be and how that should be done, whether it is effective, whether it is done with the minimum costs to future generations. Ideology, whether they are political or economical, is unhelpful to the debate, and unhelpful to getting the stimulus right to lift the economy out of recession.
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