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Thursday, March 28, 2024

Romer Channels Keynes

Courtesy of Econophile

From The Daily Capitalist

Christina Romer seems like such a nice lady but I think she is actually dangerous. It is frustrating to see those at the top of the Administration keep spouting the same old policies that have failed time and time again. Read this speech and you will see that she is channeling J. M. Keynes:

Christina Romer, chair of the president’s Council of Economic Advisers, says the reason unemployment remains so painfully high is clear: It’s not the inadequacy or laziness of the workers or the long-standing mismatch between workers’ skills and employers’ needs. It’s the old-fashioned Keynesian diagnosis: Too little demand in the economy.

Here’s the interesting and very Keynesian part of her speech [my emphasis]:

“The usual postwar recession has a fairly simple narrative. The groundwork is laid when for some reason policy is overly expansionary and so generates inflation. The recession occurs when the Federal Reserve realizes that things have gone awry. It raises interest rates, slows the economy, and so brings inflation down—at the cost of a recession.  That type of recession is easy to end: once the Federal Reserve is satisfied with the behavior of inflation, it can slash interest rates and provide the economy with a large jolt of stimulus. …

The recent recession was obviously not caused by tight monetary policy. Interest rates were not especially high when it began, and so the Federal Reserve had only limited room to cut them.  It has brought short-term rates down to virtually zero, but it cannot push them below that. The result is that we have not had the strong monetary stimulus that we would normally have in these economic  circumstances. …

She comes to the startling conclusion that our high unemployment rate is due to the severity of the recession. To correct that we need loosen credit, bail out states and municipalities, and improve exports. Gosh, that is so easy to fix.

She went on to say:

“We have the tools and the knowledge to counteract a shortfall in aggregate demand. We  should be continuing to use them aggressively.”

Here is a translation of what she is saying:

  1. Things happen in the economy and we don’t have a clue why. It’s got to be “animal spirits.”
  2. We sure as hell didn’t cause the recession.
  3. But when things do go awry, we can just pump out money, contract money, increase government spending, and things are all better.
  4. Unemployment is just terrible. Just terrible. It’s that nasty recession.
  5. If you people would just start spending everything would be wonderful, but instead you aren’t–and we aren’t sure why–so we will spend your money for you.
  6. Government spending will jump-start the economy, you just watch. Our spending will make you spend and unemployment will go away.
  7. Government jobs are just like any jobs and they are good for the economy.
  8. Our policies have been great. You think we’re bad off now, you don’t know bad.

This is high school Keynesianism or the Cliff Notes version. It’s a technocrat’s dream. You merely press on one lever here, adjust a little bit there, and people behave exactly as you wish them to, and mirabile dictu, it happens. Recessions are cured, depressions are prevented, and GDP soars. If Keynesian economics is so wonderful, why is it not working, Mrs. Romer?

They’ve been spending our money and our future money at record rates. Yet credit is frozen, unemployment is high, consumer spending (PCE) is weak, and we are seeing deflation, not inflation. As usual, Keynesians say that the government has to spend more and immediately or we’ll slip back into a depression.

Like Keynes, Mrs. Romer fails to see the obvious.

  1. I would like her or anyone to explain how the Keynesian formula (AD=C+I+G: Aggregate Demand (GDP) = consumption + gross investment + government spending) works. As Russ Roberts points out, you Keynesians have to settle on some kind of multiplier that we all understand. If she believes it’s 1.57, then where are the numbers to support this? Reading Keynes is like reading the Bible: Lord Keynes moves in mysterious way.
  2. Her conclusion that there is a  ”recovery” and it is caused by government fiscal policies are one great confirmation bias by her. That is, you ignore or are unaware of data that contradicts your desired conclusion and you find data that fits it.
  3. Q: If you spend $787 billion to “jump-start” the economy, then where does the money come from? A: Taxes, present or future. No one asks the question of what the people were going to do with the money the government took from them. Romer and her husband’s own research concluded that tax cuts help get out of a recession which is another way of saying that a reduction of government spending also helps us get out of a recession (i.e., either way the money stays in the private economy).
  4. Most of the government Recovery Act spending is wasteful. It didn’t work in Japan and it’s not doing a thing here other than increase our national debt and burden our children with taxes. Go to Recovery.gov and see for yourself. They’ve spent $225 billion so far to revive a $13 trillion economy. Most of it is just a waste.
  5. Why aren’t those tools working now? Why doesn’t Fed policy work after interest rates went to zero? Why is credit frozen… still. Why is the recession so protracted? Why are wages declining? Why is money supply contracting? Why are they doing the same things that failed in Japan?

It would have been nice if in college she had read something else besides Paul Samuelson and Keynes. Perhaps if she had read a little Mises or Hayek, or had even heard of the marginal revolution, she would at least be aware that there are some other theories out there that satisfactorily explain the business cycle. Alas, no.

We let these people lead us into the abyss and now we are asking them to solve the problem.

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