November 15, 2018

Today’s Economist: Bruce Bartlett: Keynes’s Biggest Mistake

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Over the weekend, there was a kerfuffle about whether Keynesian economics ignores the long-run implications of its policies. The Harvard historian Niall Ferguson asserted that this was the case and said that it resulted from the British economist John Maynard Keynes’s homosexuality. Professor Ferguson said that those without children, as is the case with most gay men and women, necessarily had less of a long-term view of the world than those with children who will live on after their death.

Today’s Economist

Perspectives from expert contributors.

Professor Ferguson has apologized for his off-the-cuff comment, which was widely interpreted as being homophobic. But before this incident fades from memory, I’d like to take the opportunity to discuss the questions raised by it: Is Keynes’s sexual orientation at all relevant to the interpretation of his economic theories? Does Keynesian economics completely ignore the long run?

First of all, Keynes’s sexual orientation has been known for some time, at least since publication of Michael Holroyd’s biography of Lytton Strachey in 1968. Strachey was a noted biographer, an active member of the literary Bloomsbury Group and one of Keynes’s lovers.

The revelation of Keynes’s homosexuality greatly excited his right-wing enemies, who have long used it to defame him and discredit his theories. A 1969 book, “Keynes at Harvard: Economic Deception as a Political Credo,” contains a long chapter on the subject, which describes Keynes as “a lifelong sexual deviant.” Like Professor Ferguson argued, it says that Keynes’s “aversion to human conception” was a key to his economic theories, which the book likened to Bolshevism.

The author of “Keynes at Harvard” is Zygmund Dobbs, but the driving force behind it was Archibald B. Roosevelt, who founded the Veritas Foundation, which published the Dobbs book. The youngest son of Theodore Roosevelt, Archibald Roosevelt was very active in right-wing politics throughout his life, attacking both Presidents Franklin D. Roosevelt and Harry S. Truman for coddling communists. In 1954, Archibald Roosevelt demanded that an organization named for his father rescind an award to the United Nations under secretary Ralph Bunche because of his “close affiliation with communism.”

Brad DeLong, an economist at the University of California, Berkeley, has posted a long list of conservative attacks on Keynes that have used his homosexuality as a reason to reject his economic theories. But even economists who had no interest in this aspect of Keynes’s life, like the economist James Buchanan, have criticized Keynesian economics for its excessively short-term focus and negative long-run consequences.

Unfortunately, Keynes himself was to a large extent responsible for giving this criticism of his work currency. That is because he titled his most important work “The General Theory of Employment, Interest and Money.” The term “general theory” obviously implies that it is applicable at all times, in all economic situations.

This was an unfortunate error, because the core insight of Keynesian economics is that there are very special economic circumstances in which the general rules of economics don’t apply and are, in fact, counterproductive.

This happens when interest rates and inflation are so low that there is no essential difference between money and bonds; money, after all, is simply a bond that pays no interest. When this happens, monetary policy becomes impotent; an increase in the money supply has no stimulative effect because it does not lead to additional spending by consumers or businesses.

Keynes called this situation a “liquidity trap.” Under such circumstances, government spending can be highly stimulative because it causes money that is sitting idle in bank reserves or savings accounts to circulate and become mobilized through consumption or investment. Thus monetary policy becomes effective once again.

This is an extremely important insight that policy makers have yet to grasp, even though interest rates on Treasury bills are just a couple of basis points above zero and inflation is virtually nonexistent. Although the Federal Reserve has increased the monetary base to almost $3 trillion today from $825 billion in 2007, it has had little apparent stimulative effect.

In normal times, one would expect such an increase in the money supply to be highly inflationary and sharply raise market interest rates. That this has not happened is proof that we have been in a liquidity trap for several years. We needed a lot more government spending than we got to get the economy out of its doldrums.

Although Keynes’s theory was most appropriate to the Great Depression, his followers did indeed believe in its general applicability and the Keynesian medicine was overapplied and misapplied during much of the postwar era, leading to stagflation in the 1970s. Conservatives like Professor Buchanan were right about that.

But in their rejection of Keynesian economics at a time when it needed to be rejected, conservatives threw the baby out with the bathwater and are now preventing its adoption when it is badly needed.

The criticism that Professor Ferguson implicitly leveled at Keynes of being excessively short-term oriented, therefore, has a grain of truth in it. But the much greater truth is that we are now holding the economy hostage to policies that are proper for the long-term – like stabilizing the debt-to-gross-domestic-product ratio – at a time when we face special circumstances that make such policies perverse.

In short, we are suffering from an excessive long-term focus that is crippling the economy in the short run, and the short run threatens never to end.

A friendly 1984 biography of Keynes by the economist Charles H. Hession acknowledged that his sexual orientation shaped his political philosophy. His homosexuality was “an independent element in his reformist tendency; as such, he was an outsider in a heterosexual world,” Professor Hession wrote.

I think this made Keynes more willing to think “outside the box,” as we say today, and consider ideas that ran counter to the conventional wisdom. But there is no reason to think he had any less concern for the long-run health of the economy or society than heterosexuals. Keynes understood that the long run is simply an infinite parade of short runs.

But Keynes erred in implying a more general applicability of his theories than he should have. We suffered for this in the past when they were misapplied in inappropriate circumstances, unfortunately discrediting them and preventing their adoption now, in highly appropriate circumstances.

Article source: http://economix.blogs.nytimes.com/2013/05/07/keyness-biggest-mistake/?partner=rss&emc=rss

Economix Blog: Bruce Bartlett: Keynes’s Biggest Mistake

DESCRIPTION

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Over the weekend, there was a kerfuffle about whether Keynesian economics ignores the long-run implications of its policies. The Harvard historian Niall Ferguson asserted that this was the case and said that it resulted from the British economist John Maynard Keynes’s homosexuality. Professor Ferguson said that those without children, as is the case with most gay men and women, necessarily had less of a long-term view of the world than those with children who will live on after their death.

Today’s Economist

Perspectives from expert contributors.

Professor Ferguson has apologized for his off-the-cuff comment, which was widely interpreted as being homophobic. But before this incident fades from memory, I’d like to take the opportunity to discuss the questions raised by it: Is Keynes’s sexual orientation at all relevant to the interpretation of his economic theories? Does Keynesian economics completely ignore the long run?

First of all, Keynes’s sexual orientation has been known for some time, at least since publication of Michael Holroyd’s biography of Lytton Strachey in 1968. Strachey was a noted biographer, an active member of the literary Bloomsbury Group and one of Keynes’s lovers.

The revelation of Keynes’s homosexuality greatly excited his right-wing enemies, who have long used it to defame him and discredit his theories. A 1969 book, “Keynes at Harvard: Economic Deception as a Political Credo,” contains a long chapter on the subject, which describes Keynes as “a lifelong sexual deviant.” Like Professor Ferguson argued, it says that Keynes’s “aversion to human conception” was a key to his economic theories, which the book likened to Bolshevism.

The author of “Keynes at Harvard” is Zygmund Dobbs, but the driving force behind it was Archibald B. Roosevelt, who founded the Veritas Foundation, which published the Dobbs book. The youngest son of Theodore Roosevelt, Archibald Roosevelt was very active in right-wing politics throughout his life, attacking both Presidents Franklin D. Roosevelt and Harry S. Truman for coddling communists. In 1954, Archibald Roosevelt demanded that an organization named for his father rescind an award to the United Nations under secretary Ralph Bunche because of his “close affiliation with communism.”

Brad DeLong, an economist at the University of California, Berkeley, has posted a long list of conservative attacks on Keynes that have used his homosexuality as a reason to reject his economic theories. But even economists who had no interest in this aspect of Keynes’s life, like the economist James Buchanan, have criticized Keynesian economics for its excessively short-term focus and negative long-run consequences.

Unfortunately, Keynes himself was to a large extent responsible for giving this criticism of his work currency. That is because he titled his most important work “The General Theory of Employment, Interest and Money.” The term “general theory” obviously implies that it is applicable at all times, in all economic situations.

This was an unfortunate error, because the core insight of Keynesian economics is that there are very special economic circumstances in which the general rules of economics don’t apply and are, in fact, counterproductive.

This happens when interest rates and inflation are so low that there is no essential difference between money and bonds; money, after all, is simply a bond that pays no interest. When this happens, monetary policy becomes impotent; an increase in the money supply has no stimulative effect because it does not lead to additional spending by consumers or businesses.

Keynes called this situation a “liquidity trap.” Under such circumstances, government spending can be highly stimulative because it causes money that is sitting idle in bank reserves or savings accounts to circulate and become mobilized through consumption or investment. Thus monetary policy becomes effective once again.

This is an extremely important insight that policy makers have yet to grasp, even though interest rates on Treasury bills are just a couple of basis points above zero and inflation is virtually nonexistent. Although the Federal Reserve has increased the monetary base to almost $3 trillion today from $825 billion in 2007, it has had little apparent stimulative effect.

In normal times, one would expect such an increase in the money supply to be highly inflationary and sharply raise market interest rates. That this has not happened is proof that we have been in a liquidity trap for several years. We needed a lot more government spending than we got to get the economy out of its doldrums.

Although Keynes’s theory was most appropriate to the Great Depression, his followers did indeed believe in its general applicability and the Keynesian medicine was overapplied and misapplied during much of the postwar era, leading to stagflation in the 1970s. Conservatives like Professor Buchanan were right about that.

But in their rejection of Keynesian economics at a time when it needed to be rejected, conservatives threw the baby out with the bathwater and are now preventing its adoption when it is badly needed.

The criticism that Professor Ferguson implicitly leveled at Keynes of being excessively short-term oriented, therefore, has a grain of truth in it. But the much greater truth is that we are now holding the economy hostage to policies that are proper for the long-term – like stabilizing the debt-to-gross-domestic-product ratio – at a time when we face special circumstances that make such policies perverse.

In short, we are suffering from an excessive long-term focus that is crippling the economy in the short run, and the short run threatens never to end.
A friendly 1984 biography of Keynes by the economist Charles H. Hession acknowledged that his sexual orientation shaped his political philosophy. His homosexuality was “an independent element in his reformist tendency; as such, he was an outsider in a heterosexual world,” Professor Hession wrote.

I think this made Keynes more willing to think “outside the box,” as we say today, and consider ideas that ran counter to the conventional wisdom. But there is no reason to think he had any less concern for the long-run health of the economy or society than heterosexuals. Keynes understood that the long run is simply an infinite parade of short runs.

But Keynes erred in implying a more general applicability of his theories than he should have. We suffered for this in the past when they were misapplied in inappropriate circumstances, unfortunately discrediting them and preventing their adoption now, in highly appropriate circumstances.

Article source: http://economix.blogs.nytimes.com/2013/05/07/keyness-biggest-mistake/?partner=rss&emc=rss

It’s the Economy: Should We Tax People for Being Annoying?

Instead, we all suffered. Each car added an uncharged burden to every other person. In fact, everyone on the road was doing all sorts of harm to society without paying the cost. I drove about 150 miles that day and emitted, according to E.P.A. data, about 140 pounds of carbon dioxide. My very presence also increased (albeit infinitesimally) the likelihood of a traffic accident, further dependence on foreign oil and the proliferation of urban sprawl. According to an influential study by the I.M.F. economist Ian Parry, my hours on the road cost society around $10. Add up all the cars in all the traffic jams across the country, and it’s clear that drivers are costing hundreds of billions of dollars a year that we don’t pay for.

This is how economists think, anyway. And that’s why a majority of them support some form of Pigovian tax, named after Alfred Pigou, the early-20th-century British economist. Pigou developed the idea of externalities: the things we do that affect others and that the market is unable to price. A negative externality is like the national equivalent of what happens when you go to dinner with three friends and, knowing that you’ll pay only a fourth of the bill, decide to order an expensive entree. Pigou argued that there are so many damaging things that we do — play music too loudly, drive aggressively — and that we’d probably do less if we had to pay for them.

The $10 I cost the economy was based on Parry’s algorithm, which calculates that drivers should pay a tax of at least $1.25 a gallon. Forty percent of that price, he says, is the cost that each vehicle adds to congestion. Another 40 cents or so offsets the price of accidents if we divided the full cost — more than $400 billion annually — by each gallon of gas consumed. (Only about 32 cents would be needed to offset the impact on the environment.) According to Parry’s logic, if we paid a tax of $1.25 per gallon instead of the current average of 50 cents, the price of gas would increase by about 25 percent to around $4 a gallon, which is still well below what much of Europe pays. But it would still encourage us to drive less, pollute less, crash less, lower the country’s dependence on foreign oil and make cities more livable. Not surprisingly, several studies have found that people — especially in Europe, where the gas tax is around $3 a gallon — drive a lot less when they have to pay a lot more for gas.

The idea of raising taxes to help society might sound like the ravings of a left-wing radical, or an idea that would destroy American industry. Yet the nation’s leading proponent of a Pigovian gas tax is N. Gregory Mankiw, chairman of President George W. Bush’s Council of Economic Advisers and a consultant to Mitt Romney’s 2012 campaign. Mankiw keeps track of others who support Pigovian taxes, and his unofficial Pigou Club is surely the only group that counts Ralph Nader and Al Gore along with leading conservatives like Charles Krauthammer, Alan Greenspan and Gary Becker as members.

Republican economists, like Mankiw, normally oppose tax increases, but many support Pigovian taxes because, in some sense, we are already paying them. We pay the tax in the form of the overcrowded roads, higher insurance premiums, smog and global warming. Adding an extra fee at the pump simply makes the cost explicit. Pigou’s approach, Mankiw argues, also converts a burden into a benefit. Imposing taxes on income and capital gains, he notes, punishes the work and investment that improve society; taxing negative externalities allows the government to make money while discouraging activity that hurts the overall economy.

Article source: http://www.nytimes.com/2013/01/13/magazine/should-we-tax-people-for-being-annoying.html?partner=rss&emc=rss