Closing statements
The moderator's closing remarks
Mar 18th 2009 | Mr Patrick Lane
The closing statements are in. Brad DeLong concludes by taking on Luigi Zingales's question: "What is the market failure?" Mr DeLong believes that monetary policy is the preferred means of keeping nominal income stable. But when expansionary monetary policy has gone as far as it can, banking and fiscal policies have their place. His choice of intellectual ally may strike you as surprising. In his final remarks, Mr Zingales argues again that there is no theoretical reason or empirical evidence to overturn an established consensus that fiscal policy is too slow and ineffective to be much used to offset economic cycles. He also raises another reason to resist a public-spending splurge: it is a great excuse for powerful industrial lobbies to demand lots of taxpayers' money and for politicians to spend it. Our third guest contributor, Andrew Atkeson, of the University of California, Los Angeles, explores a theme that has also cropped up on the floor of the debate (notably by Jer_X). Whether or not they are all Keynesians now, economists should be chagrined, Mr Atkeson thinks. Look how opinions have changed; look at how complacent some comments of a few years ago appear now. Continuing from the floor (as atkeson), Mr Atkeson asks: "Is the assertion that monetary policy is ineffective once the nominal interest rate has hit the zero lower bound part of the premise that we are, or should be, Keynesians now?" Maybe we shouldn't be asking whether we are all Keynesians now, or whether we should be, but when we should be. Maybe interest rates don't have to reach zero: in Britain the official rate is 0.5% but conventional monetary policy is reaching its limit. Perhaps we are all conditional Keynesians now. I suspected at the start of the debate—although I did not say so—that the definition of "Keynesian" would occupy a fair few participants. So it has proved. From the floor, lunn suggests that Axel Leijonhufvud, author of "On Keynesian Economics and the Economics of Keynes", would have helped us tell the difference. TPS makes a similar point, but refers us to Hyman Minsky. Maxine Udall and open rose quote chapter and verse from "The General Theory". Finally, I should reply to Federal Farmer. Yes, we might well have rephrased the motion, proposing that "we should all be Keynesians now" rather than "we are". But we guessed that our debaters would interpret the motion broadly, as they have. Judging by the comments, so have speakers from the floor. I can't tell, of course, whether people have voted on that basis, but that's my guess. The debate has certainly been lively, between the protagonists and among other speakers. As the end of the debate approaches, most voters are backing Mr Zingales. His lead has been fairly steady, with more than 60% in his favour.
The proposer's closing remarks Mar 18th 2009 | Prof. Brad DeLong
I confess to be dumbfounded and flabbergasted by Luigi Zingales's reply to my opening statement. Professor Zingales writes: the only interesting... [question] is whether we should... apply Keynesian policies (in particular a massive government spending) to address the current crisis.... I think that these policies can worsen the problem.... As economists we cannot... Keynesians now.... Keynesian policies... are in contradiction with most economic principles we believe in... government intervention is justified only in the presence of a clear market failure.... What is the market failure that justifies this intervention?... Let me give Professor Zingales the answer that Milton Friedman gave when asked what was the market failure that justified large-scale government intervention in a depression. In his 1972 "A Theoretical Framework for Monetary Analysis" Friedman pointed to the fact that a drop in the flow of nominal spending and income was not entirely absorbed by a drop in the price level—leaving real spending, income and production unchanged—but instead the "division of a change in nominal income between prices and output depends on two major factors: anticipations about the behavior of prices… and the current level of output or employment... compared with the full-employment (permanent) level of output or employment..." Because of this market failure—this sluggishness of price adjustment—it is, Milton Friedman thought, very important for economic welfare to keep the flow of nominal spending stable. Otherwise you oscillate between inflationary spirals that derange the functioning of the price system at a microeconomic level and periods of high unemployment and low capacity utilisation. Milton Friedman believed, and I believe, that the preferred tool for keeping the flow of nominal spending stable is monetary policy: open-market operations by which the central bank buys and sells short-term Treasury securities for cash in order to increase or decrease short-run incentives to spend. Right now, however, we are in a situation in which Ben Bernanke's Federal Reserve has done so much in the way of expansionary monetary policy that it can do no more. Interest rates are so low right now that short-term Treasury bonds and cash are very close substitutes, so trading one for another has no effect on private-sector short-run incentives to spend. But the underlying market failure that makes it very important to keep nominal spending stable has not gone away. In fact, that market failure is bigger than ever right now. The underemployment rate—unemployed, plus explicitly discouraged workers, plus part-time for economic reasons—that was 7.9% at the end of 2006 is now 14.8% and is headed at least three percentage points higher over the course of this year. So what do we do since we can no longer use our preferred tool of monetary policy to try to keep the flow of nominal spending from dropping further? We have two alternatives: banking policy—trying to act directly to reduce large risk discounts on financial assets by increasing the risk tolerance of the banking sector and diminishing the amount of risk it must bear—and fiscal policy—if private spending is collapsing then maybe government spending can temporarily fill the gap. Milton Friedman was suspicious of the power of fiscal policy. Its effects were "certain to be temporary and likely to be minor" he wrote in his comments on the critics of "A Theoretical Framework for Monetary Analysis". But in true emergencies both banking policy and fiscal policy have their due place. Friedman approvingly quoted the advice that his old teacher Jacob Viner had given to policymakers during the Great Depression—to use fiscal policy: [G]overnment and Federal Reserve [expansionary] bank operations have not nearly sufficed to countervail the contraction of credit on the part of the member and non-member banks.... There has been... a fairly continuous and unprecedentedly great contraction of credit during this entire period.... Assuming for the moment that a deliberate policy of [credit] inflation should be adopted, the simplest and least objectionable procedure would be for the federal government to increase its expenditures or to decrease its taxes, and to finance the resultant excess of expenditures over tax revenues either by the issue of legal tender greenbacks or by borrowing from the banks... And this is what leaves me flabbergasted and dumbstruck. Chicago School economist Professor Zingales today asks a question he believes is rhetorical and has no good answer: "What is the market failure that justifies this intervention?" But Milton Friedman, the founder of the modern Chicago School of Economics, had a full and comprehensive answer to this question that satisfied him—and Milton Friedman with his focus on the need to keep the flow of nominal spending stable was not a stupid man or a bad economist. And Professor Zingales gives absolutely no sign of ever having read the answer given in "Milton Friedman's Monetary Framework", or even of knowing that the founder of his intellectual school had what he at least regarded as a good and comprehensive answer. Why do the Chicago School economists of today know so much less about the economy than did their predecessors of two generations ago? I am not sure of the answer. All I know is that somehow they have been badly miseducated. For right now they challenge not only the claim that we ought to be Keynesian students of John Maynard Keynes, but even that they ought to be monetarist students of Milton Friedman. Yes, we do all need to be Keynesians now.
The opposition's closing remarks Mar 18th 2009 | Prof. Luigi Zingales
It used to be the case that most economists agreed on the major policy issues. This consensus was built through a long accumulation of empirical evidence. While any individual contribution can be criticised, it is more difficult to refute a large number all showing the same results. The force of evidence, for example, had convinced the vast majority of economists that fiscal policy was too slow and inefficient to be used in a countercyclical way. This consensus is so old and well-established that it was reflected even in my undergraduate courses when I took them in Italy more than 25 years ago. So what has happened now? Why, all of a sudden do well-respected economists, like my opponent, advocate policies that have little or no empirical support? Why do they invoke interventions they cannot justify on economic principles? Why do they claim we should all be Keynesians? This reaction is not just the result of compassion for the extreme situation we are in right now. Nobody disputes that unemployment subsidies and food stamps should be used massively to alleviate the enormous pain and suffering an increasing number of Americans are experiencing. So the question is not whether to pay idle workers (we pay them anyway), but whether to support them with an unemployment subsidy or to pay them to dig useless holes in the ground and then pay them to cover them up. Unless the project they work on is really valuable, the second strategy seems really silly. Not only are we wasting shovels and trucks in useless projects, but we are also wasting the most valuable resource: human time. While it is terrible to be unemployed, it is still preferable to the status of forced labour. But isn't it exactly what Keynesians want? Of course, there are plenty of valuable projects the government can invest in. With over-congested roads and non-existent public transportation systems, it is not hard to identify a valuable use of public money. But these projects should be argued on their own merits, not as a stimulus. If the government were careful to undertake a cost and benefit analysis of all its projects, their realisation would naturally be countercyclical. When unemployment is high and the cost of raw material is low, a lot of expensive public projects would immediately become very appealing, especially if we incorporate, as we should, that the government's additional cost of employing an unemployed worker is close to zero. Unfortunately, the Obama administration's stimulus package has very little cost and benefit analysis. It was a rush to sneak in the most wasteful projects. In fact, once you buy into the Keynesian logic, it is optimal for a politician to sneak into a stimulus package the most useless projects. The useful ones will be approved anyway. The stimulus justification becomes the best way to sell the unsellable. And since they are by choice the most unlikely projects, they are also the ones less ready and less likely to be implemented any time soon. Even worse, when the stimulus idea removes the budget constraint, it is harder to contain the lobbying pressures. I come from a country where at every recession the government ends up subsidising the national car company. I thought this was corrupt, but unique to Italy. Unfortunately, I am learning this is true in the United States too. The only difference is which the most politically powerful companies are. Is this good Keynesian policy or corrupt policy? I would vote for the latter. Keynesianism is just a convenient ideology to hide corruption and political patronage. To be fair, this is not just a problem of the Democratic party. As Brad DeLong says, the Republicans, who now want to portray themselves as the major defender of fiscal conservatism, were happy to spend and run large budget deficits when they were in power. That Republicans have committed the same crime does not make it less of a crime. Politicians like to spend others' people money when they get to spend it, not when their opponents spend it. They oppose their opponents running a deficit not out of concern for future generations, but out of mere self-interest: their opponents' deficits reduce the amount of money they will be able to spend when they eventually return to power. The most pernicious aspect of Keynesianism is that it provides a moral justification for the party in power to spend our money. That is the reason why we should not be Keynesians now or, for that matter, at any other time. | 
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发表于 2009-5-8 16:39:52
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