Wednesday 23 January 2013

If you do not understand Keynesianism do not write about it!

Sinclair Davidson has a column on Arnold Kling writing about Keynesian-economic-policy except he doesn't!

Let us examine it in detail.

1. Firstly he says the historical record shows Keynesian economic policy doesn't work. He then quotes Robert Murphy who he claims shows this but he doesn't. Actually every example of 'expansionary austerity' he cites supports Keynes contention you only do it in good times. ( Remember the IMF study on this?)
Robert Murphy is not a good 'scholar to cite

2. The macro-economic models trotted out to support Keynesian policies are highly suspect. Arnold Kling cites err Arnold Kling. wow! Only problem is that the policies are not Keynesian. Wait for it!

3. He claims that if the Keynesian rationale for deficits in recession is correct then then must be times for balanced budgets or even surpluses but most of the time there have been deficits. This doesn't make sense.
Yes any Keynesian would argue in good times you would not have a deficit. Why do they gert the blame when deficits happen when Keynesians claim otherwise!

4.He claims no Keynesian economist is coming forward to say perpetual deficits are appropriate. huh! Has this bloke ever read say Paul Krugman, Brad De Long, Larry Summers Simon Wren-Johnson, Jonathon Portes.......

5. He says the recession ended on June 2009 so therefore so should deficits.  Yikes this has tonnes (get it) of errors.
Firstly if you end deficits too early you go back to recessions. See USA 1937 or Japan 1997.
Deficits can still occur because it takes time for the cyclical part of the budget to adjust to the economy.

I am going to stop there.

Plenty of holes. How ironic that Sinclair Davidson, a person who criticises anyone who gets Hayek minutely wrong , give Arnold Kling full exposure when he isn't even criticising Keynesian policy.

The expurgated version of Keynesian policy.
You only use fiscal policy when monetary policy isn't working ,In other words when there is a liquidity trap.
This does not happen in usual recessions. It usually only occurs in Depressions but it did occur in the GFC.

Let us make it very simple. A government should rarely if ever use fiscal policy when the economy weakens.
It is more likely to use sorry it should use Keynesian policy in good times

Postscript
Samuel J writes appallingly on fiscal policy at the same blog. I cannot be bothered to go through his lack of understanding on why budgets are in deficits or surpluses ( as I have done this previously )but even a a simple minded fellow would realise if an economy is facing below trend NOMINAL GDP growth then things are not normal. Duh!  Don't write about topics you clearly do not understand.

Further Postscript
Could those friends of mine ( who all put up their fees this year (attempted humour)) please use the comments section. It means much fewer additions to the original post and also helps me.  It shows up mistakes and bad assumptions for one thing.

In normal times nominal GDP and Real GDP are closely related. however as a wise old sage once told me when I was newly arrived in financial markets. You should always use nominal GDP for examining budget outcomes because at some stage real GDP and nominal GDP will digress. In recent times we have had above trend real GDP BUT below trend nominal GDP. This discrepancy has been caused by amongst other things disinflation.
IF nominal GDP was above trend then the budget would be sailing very comfortably into surplus waters and the fiscal contraction by the public sector would be negligible.

6 comments:

  1. Bad hair day homes?

    So in your expert opinion when should we have cut out deficit spending and moved to surplus considering our terms of trade had reached unprecedented heights. What year Homicles? (who calls you that as I forget)

    ReplyDelete
  2. Have you ever tried to look at tax revenues at all.

    As a % of GDP they are as low as they were when Keating was PM.

    You really do not believe in doing any research do you?

    If the TOT had impacted revenues as they did in the Howard years there would be a substantial surplus.

    Put it another way. How do you reconcile your belief on commodity prices with the fact nominal GDP has been below trend for some time?

    ReplyDelete
  3. So what if tax receipts are lower, you dill. They are building big government through the spending side and running up deficits like a large swag of western countries.

    But you haven't answered my question which I and forced to repeat again because you're up to your old trick again.

    "So in your expert opinion when should we have cut out deficit spending and moved to surplus considering our terms of trade had reached unprecedented heights. What year Homicles? "

    "How do you reconcile your belief on commodity prices with the fact nominal GDP has been below trend for some time?"


    Doofus, the currency has appreciated enormously which has placed a dampner on import prices. So it's not surprising that in this international environment we don't have nominal GDP way out of bounds. In any event it's been running at 5% nominal which about the average for the past 20 odd years.



    ReplyDelete
  4. so we have record TOT but somehow we see no record of this in tax revenues. very strange.
    They are spending up big eh!

    wow over the last three budgets, including this one there has been thus far no real increase in spending at all.
    Moreover spending as a% of GDP has fallen from 26% to 23.8%.

    The time ,as I have stated before, for the budget to go into the black is when nominal GDP gets back to trend.

    Stil living in a parallel universe I see.

    ReplyDelete
  5. "so we have record TOT but somehow we see no record of this in tax revenues. very strange.
    They are spending up big eh!"


    Yep. Receipts don't match their insatiable spending. Pretty standard for these lunatics. Trust you to support them.

    "wow over the last three budgets, including this one there has been thus far no real increase in spending at all.
    Moreover spending as a% of GDP has fallen from 26% to 23.8%."

    Bullshit. And count the NBN which is comfortably off the budget while you're at it.

    "The time ,as I have stated before, for the budget to go into the black is when nominal GDP gets back to trend."

    I said nominal GDP has been pretty close to trend. Anyway doofus, speak the RBA if you want to change the level of Nominal GDP as they are the ones who can at any time they want.

    "Stil living in a parallel universe I see."

    You're so dense at times.

    ReplyDelete
  6. It is very hard to have a conversation with some-one who clearly rejects budget/MYEFO figures.

    Taxation revenues have fallen drastically as a % of GDP thus the argument about record TOT falls on its ear.

    Spending has not risen in real terms over the last three budgets.
    IF the government was spending up big as you allege we would observe this in the National Accounts i.e in its contribution to growth however it is DETRACTING from growth not adding to it.

    (the NBN like Australia Post or Telstra previously is not in the budget because of public sector accounting conventions. Interesting you were previously denying it was on the Balance sheet!)

    Nominal GDP has been well below trend for some time. That is directly related to the TOT. We have also experienced disinflation not stagflation.

    In the last accounts Real GDP was larger than nominal GDP!

    As I stated before but will enlarge on now the spending constraints by this government will mean if nominal GDP rises to above trend (because of TOT) then a surplus will be easily attained.


    In normal times the budget would be in a large surplus ( simply put in a average taxation revenue level Costello had in his last three years ) BUT these are not normal times.

    ReplyDelete