Wednesday, October 13, 2010

Stiglitz does not understand the economy

I saw Stiglitz speak many years ago at Chicago, and I was not impressed. I'm not impressed by his latest either:
Investment by the government in the internet "really transformed the economy" and, on average, returns on education, health and infrastructure have been good in the US, according to Stiglitz.

Increasing spending and not cutting taxes is the best way to boost the economy, he said.

"When you have households with an overhang of debt, homeowners owing more on their mortgage than the value of the homes, tax cuts are not going to stimulate the economy," Stiglitz said. "What we need now is to stimulate investment."
Got that? To fix the economy, the Government should just invent another internet. And, in a situation where people have too much debt and have difficulty making payments, letting them keep more of their own money so they can make payments isn't helpful.

You can't make this stuff up.

14 Comments:

Blogger Tschäff said...

I have a sneaky suspicion that economists in the media and in the scholarly literature have to also be politicians or they won't be taken seriously at all. Krugman admitted recently on his blog to throwing in neo-classical garbage to get his Keansian ideas published. Stiglitz must know taxing someone's income is going to make it harder for them to repay mortgages but the beneficiaries of government spending will have an easier time meeting their financial obligations. Increases in spending or decreases in taxes is very much a political question.

7:51 PM  
Blogger carping demon said...

Well, actually, Winterspeak, you didn't make it up. Maybe you could make us up a story about how reducing federal income at a time when government is the only entity interested in investing in anything would actually do anybody at or below an academic's salary the least bit of good. Or why leaving people more of their money to pay off their bills instead of stimulating demand by actually giving them money that can be spent in the market is a realistic idea.

8:46 PM  
Blogger winterspeak said...

Capring Demon: Clearly you are new to this site.

Since the US Govt is a currency issuer, it does not need to tax in order to spend. All Federal spending is money creation. All Federal taxation is money uncreation. The Government does not tax in order to spend, it spends in order to give us the money to pay our taxes (and net save).

If the Govt creates too much money, you get inflation, and would need to tax to fix that. Not a big issue right now.

7:28 AM  
Blogger The Arthurian said...

wintersqueak: "Capring Demon: Clearly you are new to this site. Since the US Govt is a currency issuer, it does not need to tax in order to spend."

sheesh, I come here looking for an explanation of these bold ideas, and all I find is unfounded assertions backed by unfounded definitions. It's always the same with you guys.

Carping -- your name strikes me as a play on "Carpe Diem." Clever.

Art

12:08 PM  
Blogger carping demon said...

Actually, (again) I'm not new around here, I've been reading your blog ever since I noticed your comments at Interfluidity and WCI. Like many MMTers, you seem to labor under the misapprehension that a simple reference to the fact that currency issuers don't have to tax to spend disolves any objections to whatever it was they said last. It doesn't. I was incorrect to suggest that federal income is needed for the government to invest, I'll give you that. (As a fan (can't think of a better word right now) of Stiglitz, who seems to me to have a better grasp on the depth of the problems we are not dealing with now than most other publicly commenting economists/policy wonks, I was annoyed with your post and spoke hastily. Still, I can't see how MMT has anything to do with the paragraphs you quoted above.

1) The government did underwrite the "invention" of the internet and the internet has made a big difference in the world economy.

2) Cutting taxes has not been shown to boost economies suffering from AD recession, and we are watching it not being shown again.

3) We do need investment now, and to the extent that people use retained taxes to reduce their personal leverage, tax cuts will not stimulate demand, and without demand there is no need for investment.

This is all so tangential to chartalism that I fail to see what you're on about with Stiglitz.

1:28 PM  
Blogger winterspeak said...

ART: You've given me an idea for another way to explain MMT. Watch for a future post.

CARPING: Unfortunately for you, I have personal experience with Stiglitz and he is, in fact, much worse than a clown. But I will leave things at "clown" for now. Spend some quality time around the guy, you may become less of a fan.

1) If the Government can pull Internets out of its hat, as Stiglitz demands, they should do so more often. Technological breakthroughs like this, which the Government can certainly help support, simply do not happen all that often and certainly cannot happen by public or private fiat.

2) Not true. We have recent (and not so recent) examples in both Japan and the US to the contrary.

3) Reducing leverage is precisely what will enable the private sector to relever again. It will turn bad loans into good ones, reducing pressure on banks. Most importantly, it will have the private sector direct both consumption and investment. A valid criticism of the Obama stimulus is that it overwhelmingly went to the Democratic vote bank.

2:33 PM  
Blogger carping demon said...

Winterspeak: your comments on JS don't make it sound as though your experience is "unfortunate for" me. As I have not had such experience, and doubt I'll have, I'll just leave "clown" for your appraisal of Mr. Stiglitz. (A word, though, the line about a nobel prize winner not understanding the economy comes across a lot like the first line of an "Aw, he's not so tough" joke. Still, "clown" it shall be for now.)

1) I read all the links, starting with yours to CNBC, and I couldn't find anywhere that JS was demanding that government pull another technology out of its hat. Government isn't going to pull anything out of it's hat as long as it refuses to reach into the dad blamed hat. From D-Day to the dawning of commercial space travel I've seen many things happen by public fiat, and none that I can name by private fiat. As a matter of fact, "private fiat" sounds like something you'd find in Afghanistan.

2) I've heard orthodox economists say this, but I've never seen any good argument for it. Japan and the US certainly do not demonstrate it in recent history. If you could point me to something published that I can get to, (like, not behind Jstore or the ssm index, etc.) that supports this claim, I would be in your debt.

3) I have to admit that I just can't get any sense out of this paragraph. Banks have plenty of money right now, (depending on how much those "AAA" cdo tranches they own are actually worth,) they're just not inclined to lend it, which is understandable given that there's not much private enterprise that's crying for investment right now, there being so little demand; it's difficult to see why people would lever up again in the remote event that they ever unlever, given 17% U6 unemployment , no sign of new manufacturing on the horizon and continued offshoring of the service industries; a valid criticism of the Obama stimulus would be that where ever it went it was predictably insufficient.

4) A new one: I don't think Republican/Democratic has any economic validity any more. Its becoming them against us again, and if you're one of them, then lucky you but WYB.

4:02 PM  
Blogger Bernard Guerrero said...

http://econweb.umd.edu/~vegh/papers/multipliers.pdf

You're welcome.

11:14 AM  
Blogger Bernard Guerrero said...

Quoth the raven, "In particular, we have found that, in economies open to trade and operating under flexible exchange rates, a fiscal expansion leads to no significant output gains."

11:16 AM  
Blogger winterspeak said...

LOL! It's the gift that just keeps on giving. Econometrics is a field filled with mindless regressions, and no understanding of any underlying mechanic, transmission mechanism, or even the direction of the causation (if it even exists).

The data and analysis in the Vegh paper, plus others of its ilk, are all garbage for a simple, common reason.

I shall leave it to commentators to try and figure out what it is.

11:59 AM  
Blogger Peter said...

MMTers can be somewhat disingenuous: they say that taxes don't fund spending, so, the govt is not constrained by the tax collection; but, if and when deficits become inflationary, the taxes might need to be raised. So, MMT with one hand giveth and with the other taketh: you don't need taxes except when you do.
Deficit doves like Stiglitz and Krugman say spend now and worry about deficits later if and when they become inflationary. What's the big difference?

8:18 PM  
Blogger winterspeak said...

Peter:

I think there's a difference in taxes being a mechanism (out of several) to dampen aggregate demand, and taxes being a mechanism to fund spending.

Stiglitz, Krugman, and others believe that taxes fund spending and this is simply not true. But fundamentally both of those entrepreneurs are hunting bigger fish.

Up to you whether any of this matters.

11:35 PM  
Blogger Peter said...

“Stiglitz, Krugman, and others believe that taxes fund spending and this is simply not true.”

Uhm, seems like a matter of semantics to me, since one way or another you might need the taxes. Besides, do you really believe that they don’t know that the govt can always “print money”, that they are that stupid? I think they understand this very well and though the causality of the view that “taxes fund spending” may be wrong (and do K or S say this anywhere?), the effect in the end is basically the same. Krugman and Galbraith exchange shows two people who agree and almost talk past each other. One is saying, “there is a scenario where deficits could cause a problem (inflation)”; the other says: “well, yeah, some unrealistic scenario, possible, but irrelevant rights now, let’s not worry about it”. The first one says: “let’s worry about it in principle but not in practice”. In the end, there is no real disagreement, just a slight misalignment in rhetoric.

“I think there's a difference in taxes being a mechanism (out of several) to dampen aggregate demand, and taxes being a mechanism to fund spending.”

Well, what other mechanisms besides reducing deficits (either by reducing spending or buy increasing taxes) does MMT propose? Warren Mosler in many places says that when inflation hits the taxes will have to be raised. I don’t know whether this is an indication of him not being sure that Job Guarantee, if implemented, will be effective enough at curbing inflation at a desired level. For example, if JG program is large enough and for some reasons most of these people are not producing real output (“digging holes and filling them up”), then I guess it will do nothing for price stability. I still need to get my head around JG, though.

“But fundamentally both of those entrepreneurs are hunting bigger fish.”

I don’t know. Maybe. To me, an MMT novice, the big MMT insight is not the causation between taxation and spending, or the “tax-driven money” paradigm (is that even fundamentally necessary for MMT?) but rather the fact that the govt deficits are the necessary condition for private saving. But I think Krugman understand that. He says, for example: “The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.” This seems to me to recognize the accounting relationship between the surpluses and deficits of different sectors.

7:23 AM  
Blogger winterspeak said...

Peter:

Again, it's up to you to decide what's important and what's not.

I think the distinction is material and not just a matter of semantics. You're free to think differently.

I believe I posted on the Krugman post where he tangled with Galbraith (who understands monetary operations perfectly well). Krugman is primarily concerned with Progressive ascendancy, which again is his business, and does not understand what Galbraith is saying. It's not accident that Krugman characterizes the current economic situation as he does in your quote -- there's a rather large elephant in the room he's not mentioning.

The definition of "deficit" is spending - taxation, so there really are no other levers for managing that. But MMT is, correctly, primarily focused on making sure the deficit matches the non-govt sector demand for net financial assets, and there are lots of ways to create that match. I personally don't like Mosler JG program btw although I understand why he proposes it.

8:52 AM  

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