Re: DeLong On Deficits, Interest Rate

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

DeLong is a diehard neo-liberal whom Tyson took to the White House as her
lap dog.  He has constantly argued that neoliberal market fundamentalism
has eradicated poverty worldwide and has taken neo-anti-statist position.
 He excells in denying the obvious and ignoring overwhelming field data and
evidence, just to appear "creative" in his interpretation of facts through
esoteric intellectual arguments.  Allan Meltzer, a monetarist with whom I
do not agree, crticized Summers and Delong on their claim that "investment
in machinery produce returns to society far beyond the return to investors"
as based on misleading data.  Typically DeLong's angry response was:  
"I think that the preponderance of the evidence is that machinery investment
does have very high social returns, but I agree that the case is not conclusive.
 
"But I think much more strongly that comments like Allan Meltzer's--which
he could not have been written if he had done his homework and actually read
our article--poison the well of economic debate."

DeLong was more ired by "intellectual foul" that by Meltzer's point that
the Summers-Delong case is "not conclusive."

DeLong will go down with Neo-liberal market fundamentalism.  There is nothing
Keynesain about him.  His critique on Skidelsky latest volume on Keynes was
an excercise in yankee chanuvinism.

I have posted my rebuttal to DeLong's criticism of Skidelsky on PKT:

DeLong attributed Skidelsky's alleged anti-American interpretation to the
latter's not being an economist (some kind of insider joke?):  

"And because Skidelsky is  not an economist, he overstates the gap between
John Maynard Keynes and U.S. Treasury official Harry Dexter White in their
joint design of the  post-World War II international monetary system at Bretton
Woods and elsewhere. Skidelsky (p. 239) writes of the relationship between
Keynes and White as a 'battle between the two... one of the grand political
duels of the Second World War, though it was largely buried in financial
minutiae...' But  that is a gross misrepresentation. When an economist like
me (DeLong) looks at the competing Keynes and White plans for post-WWII monetary
reconstruction, I am struck not by their differences but by their extraordinary
similarities. The White plan called for a Bank for Reconstruction (now the
World Bank) to finance an enormous amount of investment in the post-World
War II decades. The White plan called for an International Stabilization
Fund to repair the flaws in the interwar golds standard: to make explicit
and to enforce the rules of behavior expected of countries, to manage exchange
rate changes, to assist in resolving balance of payments  problems, to encourage
tariff reduction and free trade, and to control destabilizing movements of
"hot money" like we saw in Mexico in 1995 and in East Asia in 1997. The Keynes
plan called for the same. Oh there were differences, and the differences
were important. Keynes envisioned a much better-funded institution than White
did, capable of taking action on a much larger scale. (I should point out
that the  IMF today has only a fraction of the resources that White thought
necessary, and only a tiny fraction of resources that Keynes thought desirable.)
 Keynes saw a balance of payments imbalance as a problem for both surplus
and deficit countries, both of which needed to be encouraged to change their
policies. White saw a balance of payments deficit as the problem of the country
running  the deficit which needed to change its policies to correct the problem.
(I think White was mistaken: Keynes was more farsighted.) Skidelsky widens
the gap between the two to an immense gulf (p. 245): "The White and Keynes
plans were based on different  concepts... loans out of subscribed capital...
[or] overdrafts [created] out of nothing.... For the
British, the White Plan spelled financial orthodoxy, the gold standard, and
deflation; the the Americans,  the Keynes plan spelled reckless experiment
and inflation..." He sees the differences as the result of American malevolence
(p. xx):  "Harry Dexter White of the US Treasury wanted to cripple Britain
in order to clear the ground for a post-war American-Soviet alliance..."
 But Skidelsky is wrong. He quotes (p. 253) a  critic of both plans who had
a much clearer view of what was at stake. This critic at the time saw both
plans as near-identical twins: "both plans set up a super-national Brains
Trust which is to think for the world and plan for the world, and to tell
the governments of the world what to do.' They were both British plans...
both reflected trends in Keynesian thinking and British monetary policy..."
Keynes
agreed that the differences were less important than the similarities. He
 focused not on what was left undone but on what was accomplished, and what
was
accomplished was "... a revolutionary change for the better compared with
the position in the interwar period..." (p. 328). What about American malevolence
seeking to cripple Britain? It is only fair to counterbalance Skidelsky's
view of Harry Dexter White--a complex man, Russian agent of influence, New
Dealer, ruthless bureaucratic infighter, accomplished technocrat, and co-architect
of the post-World War II international monetary system that played a key
role in giving the world economy its fastest generation of growth ever--with
John Maynard Keynes's view (p. 323): "With Harry White, as you may suppose,
we have been spending a vast amount of time... over-bearing, a bad colleague,
always trying to bounce you, aesthetically oppressive...  not the faintest
conception of how to behave.... At the same time, I have a very great respect
and even liking for him. A very able and devoted public servant, carrying
an immense burden of responsibility and initiative, of high
integrity and of clear-sighted idealistic international purpose, genuinely
intending to do his best for the world. Moreover, his over-powering will
combined with the fact that he has constructive ideas mean that he does get
things done, which few here do. They way to reach him is to respect his purpose,
arouse his intellectual interest (it is a great softener to intercourse that
it is easy to arouse his genuine interest in the merits of any issue), and
to tell him very
frankly and firmly without finesse when he has gone off the rails..." Keynes's
true adversary wasn't Harry Dexter White. His true adversaries were 
those who feared any form of international financial management, or those
who wanted tight controls over all international economic transactions. But
Skidelsky does not see this." End of DeLong quote.

DeLong's view can only be argued from a purely economics perspectives. But
the struggle between Keynes and White was political.  The subtle economics
difference between the two plan represented a huge gulf politically.  The
Keynes plan  fitted the need of a financially drained British Empire while
the White plan fitted the needs of a financially well heeled US.  Neo-liberal
economists, of whom DeLong  is a card carrying member and an active participant
in the Clinton White House, 
never understood the political implication of their economic logic, as eveidenced
by Larry Summers' infamous World Bank memo.  Which leads to DeLong's next
criticism of Skidelsky: 

"I've (DeLong) talked about the good and the bad. Now I  have to talk about
the ugly--even though the ugly takes up a very small number of pages in the
book, and appears to be an afterthought largely confined to the  introduction.
Skidelsky appears to have fallen under the influence of a strange and sinister
sect of British imperial conservatives who believe that somehow the U.S.
during World War II provided aid to Britain on niggardly terms, terms guaranteed
to destroy Britain as a great power. Skidelsky writes (p. xx) of the "...intensity
and often bitterness of the struggle between Britain and America for
 post-war position which went on under the facade of the Grand Alliance.
When the European war started, Britain, not  Germany, was seen by most American
leaders as America's chief rival..." The chief accusation seems to be that
America squeezed Britain's financial resources dry before it would open the
spigots of Lend-Lease aid, and so destroyed Britain as a great power. Any
economist would know that  this is total nonsense.  But even though it is
nonsense, Skidelsky seems to believe it.
He writes of how (p. xv)  "Churchill fought to preserve Britain and its Empire
against Nazi Germany. Keynes fought to preserve Britain as a Great Power
against
the United States. The war against Germany was won; but, in helping to win
it, Britain lost both Empire and greatness..." He writes of how (p. xxi)
it was a
tragedy that Hitler's being "in charge of a great nation... threw Britain
into  the arms of America as a suppliant, and therefore subordinate: a subordination
masked by the illusion of a 'special relationship'...". He even seems (I
can barely believe it) to feel some regret that the British government's
"...underlying
belief that the New World had to be yoked... to the Old" led to "...the  deference
Britain paid to America's wishes... and its failure to exploit crucial elements
in its bargaining position--like fighting a more limited war, or even making
a separate peace with Germany..." (p. 180)." End.

HCKL: Anyone who reads declassified documents on war time Allied summits
will  find a lot of evidence to support Skidelsky's observations.  Until
his untimely 
death, FDR was on a collision course with Churchill on the war's objective
vis-a-vis British colonialism.  It was not until Truman replaced FDR that
US policy 
accepted British insistance on the preservation of the British Empire as
a war aim.  This policy change greatly limited US option in developing a
viable post war policy toward new emerging nations of the Third World. that
eventually led to the Vietnam War, by equating Third War nationalism with
communism.

DeLong: "But everyone knows that a Britain that made peace with Hitler in
1941 because American Lend-Lease aid was insufficiently generous would not
be great.
Britain fought to defeat a tyranny, not to preserve an empire."

HCKL: This is embarrassing self deception. Even the US only declared war
on Germany after Pearl Harbor.  German tyranny had by then been going on
for a 
number of years.  Prominent Americans were actively against US involvement
and many were actively pro Germany until after Pearl Harbor.  WWII was a
conflict of geo-political interests among great powers.  The struggle against
tyranny image was an afterthought icing on the cake.  DeLong is obviously
suffering from the Quiet American syndrome.

As for the Bush tax plan, here is my take (which I am told has been quite
well received in the Third World):

http://www.atimes.com/atimes/Global_Economy/EA10Dj01.html

Henry C.K. Liu


Henry C.K. Liu

Allan Meltzer  
has attracted my ire for going beyond the bounds and committing a 15-yard
intellectual foul...

---

Consider the following from Allan Meltzer, a critique of a line of work on "Equipment Investment and Economic Growth" that I have been pursuing with Larry Summers:

...Professor Lawrence Summers and Bradford DeLong claim to have evidence that investments in machinery produce returns to society far beyond the returns to investors.... The state, however, can supplement private investments, or subsidize them, and capture the returns for society....

Alas, it isn't so. Subsequent research showed that Summers and DeLong were misled by the presence of Botswana in their data set. During the sample period they used, Botswana invested heavily in mining machinery to exploit its diamond mines.

Botswana had the highest growth rate and the largest share of spending on equipment investment, so machinery investment and growth appeared to be strongly related. Excluding Botswana, one of sixty countries, showed the results to be spurious.

Now take a look at a selection from the very first thing we wrote about equipment investment and economic growth, taken from the section, "Sample Selection Issues", where we discussed which observations should and should not be in our data set:

Results using the entire 61-nation sample are somewhat sensitive to outliers. The exclusion of Zambia, for example, raises the adjusted R2 in the regression underlying Figure VI from 0.29 to 0.44; the exclusion of Botswana would reduce the adjusted R2 from 0.29 to 0.21. Inclusion or exclusion of these two countries can move the equipment share coefficient between 0.21 and 0.31, although the coefficient remains significant at conventional levels.

....[I]t is worth pointing out that [the large 61-nation sample] omits two outlier nations with large identifying variances that would significantly strengthen our findings. Both Singapore and Taiwan have had high equpment quantities, low equipment prices, and rapid productivity growth in the post-World War II period. Neither Singapore nor Taiwan is in our sample.... The inclusion of these two observations would strengthen our conclusions.

Let's run, backwards, through what Meltzer said:

Claim: "Excluding Botswana... showed the results to be spurious"

Truth: Whether Botswana was left in or taken out of the sample, the results still held: "remain[ed] significant at conventional levels"

Claim: "Summers and DeLong were misled by the presence of Botswana in their data set."

Truth: As we wrote in our very first paper on "Equipment Investment and Economic Growth", the surprisingly strong association between equipment investment and economic growth is there--whether Botswana and other low-income outliers are included in or excluded from the data set.

Claim: "Subsequent research showed..."

Truth: We were the ones who flagged the effect on our statistical study of the inclusion in our sample of Botswana (and of Zambia, and of Tanzania, and the omission of Singapore, and of Taiwan) as important issues. The implication that we did not understand what was going on in our dataset until "subsequent research" pointed it out to us is wholly false.

In the long run it will become clear whether countries with high rates of machinery investment grow rapidly because the social returns to investment in machinery and equipment are astronomically high, or because of some one of the other factors Larry Summers and I discussed in our articles: perhaps machinery investment is high in fast-growing countries because investors forecast fast growth and high profits, and channel investment into such countries; perhaps machinery investment is high in fast-growing countries because savings are high whenever income is growing rapidly, and savings have to be used for something; perhaps machinery investment is high in fast-growing countries because governments that make investment profitable are taking many other steps--educating the population, controlling corruption, reforming the tax system--that promote growth.

I think that the preponderance of the evidence is that machinery investment does have very high social returns, but I agree that the case is not conclusive.

But I think much more strongly that comments like Allan Meltzer's--which he could not have been written if he had done his homework and actually read our article--poison the well of economic debate.

---

Robert Vienneau wrote:
> Has anybody been following Brad DeLong's weblog lately? In many, many posts he
> has objected to the recent Bush tax-cut-on-some-divends policy. DeLong's
> objections
> have been overwhelmingly on the following grounds:
>
> (1) Higher deficits will ultimately raise interest rates. And economic
> growth will be
> slower as a result. It's all a matter of supply and demand, as taught in
> the first weeks
> of a freshman economics class. The laws of supply and demand have theoretical
> exceptions, but there's no particular reason to expect  the bond market to
> be special.
> One cannot really argue otherwise.
>
> (2) Glenn Hubbard, the head of the Council of Economic Advisors, believes
> this, as
> shown by his textbook. So he is being hypocritical in his public
> statements, where
> he says otherwise.
>
> Paul Krugman has raised these points in his NYT column, too.
>
> So much for New Keynesian and Stiglitz's macroeconomics, which I don't know
> much about. I seem to remember some debate here about how open leading-edge
> mainstream macroeconomists are to something approaching Paul Davidson's
> views on uncertainty. Here's a data point.
>
> And so much for Samuelson's acceptance of the Sraffian argument. It was not
> about
> the general logic of long run theory. But only about special cases not shown to
> be of any empirical importance. No particular focus was given to markets for
> capital.
>
> I have brought up these debates, particularly the Cambridge Capital
> Controversy,
> in DeLong's comment sections. (I labeled DeLong's opinion as the Treasury View
> in one comment.) Every time I have said I was not defending Bush or Hubbard. I
> have made sarcastic comments about Bush's unstimulus package. Yet I keep on
> getting responses about how absurd it is to say Bush or Hubbard is a Sraffian.
>
> I guess it is good that Krugman criticizes the Bush administration's lies.
> But I
> cannot say I am comfortable with leading "respectable" spokesmen for my side
> putting forward such trash about economics.
>
> Robert Vienneau
> rvien@xxxxxxxxxxxxxx
> Rome, NY