Re: Brad DeLong's column

["Mathew Forstater" <forstate@xxxxxxxx>]

Both of the quotes-- deficits crowd out private investment and deficits
cause high interest rates (more specifically there that lowering deficits
cause lower interest rates) are pure Summers, but you are right that
"pre-Keynesian" is the correct general label.  Bob Eisner and Bill Vickrey
spent their lifetimes trying to debunk these kind of standard mantras, that
would be ridiculous if not for the fact that they influence policy.  They
are called "pre-Keynesian" because these generally depend on asssuming full
employment.  My students in Principles understand this.  It is amazing that
the same news summary will quote Clinton on paying down the national debt
will allow lower interest rates and then report on the Fed will decide
whether to raise or lower interest rates, without blinking.  But why would
Brad contribute to perpetuating such theoretically, empirically,
historically, unsupportable views, when he surely knows better?


-----Original Message-----
From: Jim Devine <jdevine@xxxxxxxxxxxxxxx>
To: pen-l@xxxxxxxxxxxxxxxxxxx <pen-l@xxxxxxxxxxxxxxxxxxx>
Date: Thursday, April 06, 2000 11:09 AM
>Subject: [PEN-L:17753] Brad DeLong's column


>In today's NY TIMES, Brad DeLong (an erstwhile participant in pen-l and an
>editor of the prestigious JOURNAL OF ECONOMIC PERSPECTIVES) has a column,
>on page 2 of the business section. It's interesting and useful in some
>ways, but suffers from some basic economic mistakes.
>
>He writes that in the 1980s: "The [government] deficit meant reduced money
>for [private fixed] investment, which meant lower income growth, which
>meant lower [tax] revenue growth."
>
>This follows the pre-Keynesian (and discredited) view that saving drives
>investment, so that government dissaving (deficits) hurts private
>investment. It ignores how government deficits create markets for business
>output, raise capacity utilization rates, and thus business profitability,
>which _encourages_ investment ("crowding in").
>
>Further, it ignores the role of Paul Volcker's monetary policy, which hiked
>interest rates dramatically and thus crowded out private investment,
>especially in exporting or import-competing sectors, which suffered from
>the high dollar exchange rates which resulted from his policies. (I know
>that the term "crowding out" is supposed to refer only to the government
>budget's negative effect on private investment, but that shows a residual
>Monetarist bias: the government's budget deficit -- which leads to high
>interest rates (at least in theory) -- is _bad_, while tight monetary
>policy -- which leads to high interest rates -- is _good_.)
>
>Finally, it ignores the role of low profit rates -- akin to Keynes'
>marginal efficiency of capital -- in discouraging private investment, along
>with the corporate debt load of the time. Low capacity utilization -- a
>result of Volcker's policies, not Reagan's fiscal policies -- and the
>persistence of high labor costs and energy costs (high from a capitalist's
>viewpoint) kept the profit rate low.
>
>Later, he writes that "Lowered interest rates [in the 1990s] driven in part
>by the shrinking of annual budget deficits..."
>
>According to the usual sources on interest rates, the 1990s real interest
>rates were high, not low. (And it's the real interest rate that counts
>here.) For example, on page 19 of the 8th edition of RJ Gordon's
>MACROECONOMICS textbook, the real interest rate during the 1990s has been
>significantly higher than during the 1960s and especially the 1970s. It's
>true that the rates were higher in the 1980s -- mostly due to tight
>monetary policy -- than in the 1990s.  But that was part of the Volcker
>anti-inflation campaign, which should have returned real interest rates to
>levels seen in the 1960s, no?
>
>Why did private investment do okay during the 1990s? Because the Reagan era
>smashed labor and eventually cut wage costs, while until recently energy
>costs were down, so that the profit rate rose steeply until at least 1998.
>This encouraged private investment, as the (expected) benefit from it
>exceeded interest costs. The explosion of consumer debt in the late 1990s
>also allowed full capacity utilization, encouraging private fixed
investment.
>
>(It's interesting, by the way, that economists who decry the negative
>effects of government deficits (as Brad did in the first quote) don't
>mention the negative effects of consumer deficits. After all, consumers,
>unlike the U.S. Federal government, can go bankrupt, encouraging a steep
>recession. Maybe the U.S. government could go bankrupt, but not until we
>have a civil war or similar event.)
>
>Finally, he refers to "social democratic adversaries" of the Reagan
>program. Who are these? In U.S. parlance, "social democracy" means nothing
>to anyone except intellectuals who study Western Europe. That's because
>social democracy never made it as a political movement in the U.S. and the
>glimmerings of social democracy never had deep roots in organized labor.
>Instead, we had anemic New Deal liberalism (a weak welfare state tied
>intimately to the warfare state), which is to social democracy the way a
>painting on black velvet is to a Rembrandt. While there are social
>democrats out there (I could name a few), they do not represent a major
>force that opposed Reaganism.
>
>Jim Devine jdevine@xxxxxxx &  http://liberalarts.lmu.edu/~jdevine