Sunday, January 03, 2016

Stiglitz on the massive need for Keynesian stimulus policies

"The obstacles the global economy faces are not rooted in economics, but in politics and ideology." - Joseph Stiglitz, 2016

He makes this case in the form of a sensibly Keynesian diagnosis of the state of the world economy in The Great Malaise Continues Project Syndicate 01/03/2015.

The politics in much of the West have been in hock to the gospel of neoliberalism (aka, free-market fundamentalism, Herbert Hoover economics, Angela Merkel economics) for so long now that bonehead textbook Keynesian economics sounds dangerously radical. But however one chooses to position it on the current political spectrum, Keynesian economic analysis address the kinds of problems many economies currently have and offer useful solutions. Not least among them is the need to flush what Stiglitz calls "deficit fetishism." That's why Keynesians like Paul Krugman, who tend to call themselves New Keynesians these days, and Post-Keynesians like Jamie Galbraith and Yanis Varoufakis find a lot to agree on in terms of immediate policy needs right now.

Krugman gives us a hint of what some of the difference would emerge in his post, Presidents and the Economy 12/30/2015:

After I put up my post comparing private-sector jobs under Obama and Bush, a number of people asked me whether I believe that presidents have a large effect on economic performance. My answer is no — but conservatives believe that they do, which is why this kind of comparison is useful.

To expand on my own views, in normal times the economy’s macroeconomic performance mainly depends on monetary policy, which isn’t under White House control. Now, we’ve been in a liquidity trap for the whole Obama administration so far, giving fiscal policy a much more central role — and the initial stimulus did help quite a lot. Since 2010, however, fiscal policy has been paralyzed by GOP obstruction, so we’re back to a situation where the WH has little influence. [my emphasis in bold]

The last book of John Kenneth Galbraith's (1908-2006) published during his lifetime was The Economics of Innocent Fraud (2004). He devotes one of the chapters in this short book to what he calls "our most prestigious form of fraud, our most elegant escape from reality." That, he explains, is that, "Quiet measures enforced by the Federal Reserve are thought to be the best approved, best accepted of economic actions. They are also manifestly ineffective. They do not accomplish what they are presumed to accomplish. ... Here is our most cherished and, on examination, most evident form of fraud."

This is a major difference between New Keynesian and Post-Keynesian economics. The former have faith in the effectiveness of monetary policy, the latter have little or none. I assume that some in the post-Keynesian camp don't go quite as far as Galbraith senior did in dissing monetary policy. However, when it comes to addressing a recession or depression - specifically in economist-speak when the interest rate is at the lower bound, i.e., near zero - New Keynesians and Post-Keynesians alike recognize that monetary policy isn't much use in restoring growth. And not just monetarists, who have declined tremendously in their number of adherents since the 1970s, but the other various forms of conservative/neoliberal economic theories are still devoted to the notion of the Fed's magical monetary powers. As are many investment advisers and people who try to follow the stock market closely on their own with no specialized training.

But getting back to Stiglitz, he's right on the mark here:

Former US Federal Reserve Board Chairman Ben Bernanke once said that the world is suffering from a “savings glut.” That might have been the case had the best use of the world’s savings been investing in shoddy homes in the Nevada desert. But in the real world, there is a shortage of funds; even projects with high social returns often can’t get financing.

The only cure for the world’s malaise is an increase in aggregate demand. Far-reaching redistribution of income would help, as would deep reform of our financial system – not just to prevent it from imposing harm on the rest of us, but also to get banks and other financial institutions to do what they are supposed to do: match long-term savings to long-term investment needs.

... It makes sense for countries like the US and Germany that can borrow at negative real long-term interest rates to borrow to make the investments that are needed. Likewise, in most other countries, rates of return on public investment far exceed the cost of funds. For those countries whose borrowing is constrained, there is a way out, based on the long-established principle of the balanced-budget multiplier: An increase in government spending matched by increased taxes stimulates the economy. Unfortunately, many countries, including France, are engaged in balanced-budget contractions. [emphasis in original]

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