Paul responds
Karl Smith, if I understand him, thinks that I should refrain from pointing out how foolish and destructive foolishly destructive ideas have been, and offer the proponents of these ideas a face-saving exit.
Chris Dillow, via Mark Thoma, explains why this is wrong. Dillow points out that Labour is responding with incredible lameness to the Cameron austerity agenda, even as this agenda fails, because it allowed Cameron to shift the Overton Window, so that only varying degrees of austerity are considered “responsible”
I’m trying to shift that window back, both by relegitimizing Keynes and by delivering ridicule where ridicule is due. And I think I’m making progress.
I appreciate the point. I really do. Where we may part ways is on how successful this strategy has been.
A somewhat separate point though: its still not clear to me why a policy of supermassive tax cuts would not have worked. If we care about people this seems like way to get the most bang. Forget the buck, Treasuries have negative real yields.
At the recessions outset I led with: complete suspension of the payroll tax, 100% depreciation in year 1 and open ended loans to state governments. I still don’t see how this wouldn’t have been better than what we got and more politically palatable.
Looking back I would have done even more. I would have probably lopped 50K off of AGI for singles and 100K for couples. And, I would have written it just like that – which though it might have gone unnoticed by the press, every need based formula based on AGI would suddenly get triggered for people much further up the income scale.
As I see it failure to do push this was just as much a failing of Very Serious Syndrome as anything Paul points to.
Larry Summers said, Temporary, Timely and Targeted. But, that is the completely wrong perspective. It should be overwhelmingly huge, indiscriminately flung and completely open ended.
This is because the loss function is not symmetrical. The goal is not to get the right answer but the optimal outcome. Which means you throw as much as you can, as fast as you can in the general vicinity of the problem.
Ironically, it was Larry who made this click for me when I heard him repeat the aphorism: If you never miss a flight, you’re getting to the airport too early.
With a loss function this asymmetric if you don’t overwhelmingly expect to look back and think “Man, we spent way too much money” then you aren’t spending nearly enough.
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Tuesday ~ February 21st, 2012 at 7:33 am
Jacob
Krugman always seems to forget that we did a second, $800 billion round of stimulus in late 2010. Yeah, it wasn’t optimal, but it did make the difference.
Tuesday ~ February 21st, 2012 at 7:54 am
Jonas
This is a tremendously refreshing view. Obviously, the spaghetti approach triggers fears in some that ‘those people’ might get some of the relief.
Tuesday ~ February 21st, 2012 at 7:59 am
Max
How about this as an alternative: give Warren Buffett $1 trillion to invest for maximum return. No restrictions.
Best case, the economy revives immediately and he returns the money.
Worst case, he invests the money and makes a large profit for the treasury.
Tuesday ~ February 21st, 2012 at 9:00 am
nemi
“asymmetric loss function”
Karl – You are the winner of the new reality show called “economist´s got talent”
(an catchy one liner is worth a thousand research papers)
But I do not understand in which way this is a response to Paul
Tuesday ~ February 21st, 2012 at 9:18 am
Curt Doolittle
This post is another example of why Karl Smith is a better public intellectual than Paul Krugman, and why we need to get Karl a top ten news media publication vehicle. In the end, no matter how many insights Krugman has had in the field, he is an ideologue advancing a METHOD for intellectual, and personal reasons, not a practical intellectual seeking meaningful solutions to tactical problems. Krugman is the proverbial hammer looking for a rusty Keynesian, government-expanding, nail.
Karl Smith is the real thing: a public intellectual with potential to be the rarest of creatures: a statesman. A “skeptical empiricist” who is willing to employ a far wider toolset, constantly seeking innovative means of altering the economy.
The only thing Karl needs to do is incorporate the practical reality of the use of political systems as the pursuit of power by interest groups, who have permanent, irresolvable, mutually exclusive, conflicting goals, not only because of differences in group preferences, ability and resources, but because of the conflict between the conservative constrained vision of hubristic human nature, and the progressive unconstrained vision of egoistic human nature. And the conflict between the conservative desire to regulate birth rates among the lower classes and to accumulate capital, and the progressive desire to expand the birth rates of the lower classes, and distribute and consume capital. Politics is the pursuit of power. Political systems exist to resolve conflicts between groups who compete for power. The “Common Good” is an accidental byproduct of the political competition between groups who seek expansion of power, rents, status, and opportunity.
Karl, like most sentimental Progressives, (in contrast to his Smithian intellectual framework) believes that the future is uncertain and we can and must adapt to it. Conservatives believe that the scope of the kaleidic future can be narrowed if we ‘do no harm’ in the short term.
One cannot make meaningful economic policy in a democratic polity without treating political powers as materially meaningful weights which must be applied to any model, and an integral part of any consequential recommendation for political action.
Ignoring politics is unscientific. Plain and simple.
Tuesday ~ February 21st, 2012 at 10:22 am
DJAnyReason
I think Krugman would agree that the policy you’re advocating would have been better than what we got. In fact, he’s posted recently that even without “shovel ready” projects we could’ve just given wads of cash to states to avert state layoffs. However, I think he would (correctly) disagree with you that it would have been more politically palatable. Mitch McConnell has shown an impressive ability to impose party discipline in the Senate, and his strategy has been to deny even the appearance of bipartisanship. I’m pretty sure the Smith proposal would’ve been an equally hard sell to get through congress, and probably would’ve been meat-grindered into something much less good – off the top of my head, a permanent suspension of the Payroll tax.
Tuesday ~ February 21st, 2012 at 4:51 pm
Curt Doolittle
I don’t think so. I’m pretty sure it would have been possible to put a consensus together on it as long as some compromises had been made available to the other side.
The conservatives don’t care about spending as much as care about increasing the bureaucracy. The progressives would have been able to fund favorite programs. Both would be heroes for their bases.
The real problem we at the time was the noise level. There was just too much of it. The admin and congress were overwhelmed.
The pure Keynesian spending approach just was a non starter. Galbraith’s approach was a moral hazard problem. The monetarists were fighting a momentum issue. Karls solution would have been possible if more economists would have given up in the purely monetary or purely Keynesian arguments. But alliances have consequences and no consensus that was politically tolerable could be put together.
Tuesday ~ February 21st, 2012 at 10:29 am
No Country For Constitutional Men
A debt problem can never be cured with more debt. It’s a fact for God’s sake, or have you missed all the printing into the black hole of the last 4 years by the world’s governments?
All you have to do is look at the stats:
U6 unemployment over 15%
46 million Americans on Food Stamps
labor participation rate still falling
I could go on, but unless you have been asleep you can’t miss the misery of J6P while the bankers live it up like no tomorrow with other people’s money. Until you produce which creates real wealth, you are simply digging a frigging bigger hole with monetary and fiscal stimulus. You are robbing the economy with vast misallocations of debt that that can never be repaid.
MMT = Monetary Madness Theory
Tuesday ~ February 21st, 2012 at 11:38 am
Jonas
NCFCM = Fool of the Highest Order.
Seriously, have you no sense at all? What leads you to believe that we’re headed into a ‘black hole?’ It’s got to be so comforting to know that, with your relative unconcern with current problems, you’ve got it All Figured Out. I suppose, then, that it is to no end that so many very intelligent people are trying to sort out what’s happened and how to rationally move forward. They don’t even all agree, but at least they’re thinking. Something to consider, perhaps.
Tuesday ~ February 21st, 2012 at 11:53 am
Liam C Malloy
My only concern with this policy is that people would have used it to replenish their balance sheet, banks would have used their savings to capitalize, and we still would have ended up with at least 10% unemployment. Now maybe we end up with 10% unemployment for a year and then recover much more quickly than we actually did as people start spending again. But if people don’t want to spend because their net worth just took a major nosedive, giving them a tax cut will not make them do so.
Tuesday ~ February 21st, 2012 at 5:32 pm
Karl Smith wished we’d have had a revenue-side stimulus « Blog of Rivals
[...] response to a recent Krugman column on austerity, Karl Smith asserts that he would have liked, “complete suspension of the payroll tax, 100% depreciation in year [...]
Wednesday ~ February 22nd, 2012 at 9:12 am
No Country For Constitutional Men
What happened? If you are still trying to figure out what happened, then I feel for you. Glass-Steagall and Pecora Commission ring a bell for you? CDO and CDS writing when credit couldn’t be expanded any further without them. Allowing Sweeps on customer ACCTS. and reduced reserve requirements. Give me a frigging break with your trying to figure it out nonsense. RICO! There we figured it out together.
Wednesday ~ February 22nd, 2012 at 9:26 am
No Country For Constitutional Men
One other point for the brainiacs trying to figure it out. You cannot grow debt more than GDP for decades without hitting th wall. It’s called exponential math and maximum potential. And where the Hell is Jon Corzine, as his sorry arse should be in jail? We can figure out how long he needs to be there based on his crimes, if you would like to figure something out.
Thursday ~ February 23rd, 2012 at 7:20 am
mike
But Karl:
What you’re proposing would have made the Austerians cry no less loudly. It would not have passed an olive branch or fig leaf to the other side.
Not long ago, I think I thought as you do. But I was wrong. Paul is right to relentlessly bang them on the head with facts.
How’s it been working? Quite well, I think. Who, after all, is more influential?