Yesterday The Economist opened an online debate on Keynesian principles by asking two economists, Brad DeLong and Luigi Zingales, to take up the proposition, We are all Keynesians now.
The debate allowed comments from readers, and many of the comments pointed out that the nous-sommes-tous proposition itself was badly phrased. But there was wisdom in the house’s folly, and it turned out that putting things in this broad way actually helped get the debate off to a promising start: both DeLong and Zingales had to spend some time in the first round trying to figure out what the proposition meant, or could mean.
DeLong was charged with holding up the “pro” side of the question. His intellectual honesty wouldn’t allow him to defend the proposition outright; so instead he took the tack that he wished it were true that we were all Keynesians, or that we all should be.
The crux of his argument, at least as I read it, involved a refutation of Say’s Law. Those who have misgivings about government spending, or who argue that spending (from the government or any other quarter) cannot spur economic growth, create jobs or raise production are appealing, whether they know it or not, to Say’s Law. That law holds — wrongly, says DeLong — that demand is created by supply, not vice-versa. If government spends (to create demand), increased supply (which brings job and production figures up) will not necessarily follow; indeed, say the proponents of Say’s Law, the private sector or consumers may cut back on spending. Supply will stagnate.
For DeLong, Say’s Law is patently false. “In general,” writes DeLong, “spending works to spur the economy, and the government’s money when spent is as good as anybody else’s.” To back up this assertion, he adduces two examples: the first, oddly, is the creation of the housing bubble from 2003-2006, made possible by capital inflows from Asia and easy money from the Fed; the second is the creation of the dot-com bubble from 1996-2000, “when the assembled investors of America discovered the internet and in response businesses spent money like water on computers and telephones.”
While there’s no doubt that IT spend was a driver of growth at the end of the last century, I would question whether bubbles are really the best example of growth, or whether either the housing or dot-com bubble disproves Say’s Law once and for all, as DeLong seems to suggest.
There is, after all, a difference between actually creating demand and simulating demand — isn’t there? And more importantly there is a difference between sustainable growth and growth that turns out to be illusory — a mere bubble. Isn’t there?
Zingales brought the whole issue more clearly into focus when he argued that Keynesian economic policy cannot be the solution to the current crisis; to assume that you can fix the current crisis by simulating (or, DeLong would say, creating) demand is to misunderstand our trouble: “The current crisis is not a demand crisis,” wrote Zingale, “it is a trust crisis.”
In a comment, I asked DeLong to take up the point, and to say a few words about how the current wave of government spending might help to restore trust and confidence.
He posted his reply:
We have a banking trust crisis. Fixing that requires fixing the banking system. Keynesian deficit spending policies don’t help fix that crisis.
But the banking trust crisis–which has been rolling forward for eighteen months now–has in the past six months generated another crisis: a collapse of spending and collapse of employment crisis.
Keynesian deficit-spending policies can help keep this second crisis from growing much worse. Indeed, they are about the only thing that can.
First, a clarification, or an admission that I might have misread the remark that prompted my question in the first place. I am not an economist, so I take words like “trust” in the way most ordinary people do, according to the meanings they have in everyday conversation. So I didn’t understand, from the outset, that Zingales was confining himself to “banking trust,” the trust that allows credit to flow; I assumed that the breakdown of the banking system had eroded trust in a more fundamental and pervasive way. Indeed, that’s been my understanding since this whole mess started, and it seems I brought those broader concerns about trust to my reading of Zingales.
But let’s confine ourselves for the moment to the banking trust crisis. DeLong admits that Keynesian deficit-spending policies won’t — or “don’t” — fix “the banking trust crisis”; so the answer to my question seems to be: the current wave of government spending will do nothing to restore trust and confidence. But Keynesian policies will help prop up spending and employment, DeLong adds, which are collapsing due to, or in the wake of, the banking trust crisis.
This may seem a bit like trying to make repairs to a house built on quicksand, which is why, I suppose, DeLong prefaces his remark about Keynesian policies by noting that we have to fix “the banking system” in order to restore banking trust. Apparently the Keynesians are going to leave us on our own to perform that Herculean feat, while they take care of the spending.
My fear is that the Keynesians will go for the quick fix, because that is what Keynesians and policy-makers of every stripe do. But still, I wonder whether DeLong wishes to leave open the possibility that addressing the spending and employment collapse will help restore “trust” in some broader sense? And if so, how might that play out in real world terms? Would he at least admit that you can’t create demand without restoring trust? How, for that matter, can we talk about demand without talking about trust? Isn’t trust an essential component of demand? If not, then what, exactly, is demand?
For non-economists at least, demand and trust are not mere ideas, abstractions or models. Perhaps some deeper and broader appreciation of the workings of trust in our lives — in our jobs, in our everyday associations — would strengthen the Keynesian position DeLong espouses; or reveal the insufficiency of Keynesianism that DeLong seems on the verge of admitting.
Then again, maybe this is really just all about my misreading of the word “trust.” As I say, I read it broadly; and I consider it essential to the workings of the free market and a free society. So my concern is not just with the flow of capital but with a loss of social capital.
We can’t confine “trust” to the banking system, or build a firewall between the “trust” that makes the banking system work, on the one hand, and the broader social trust on which we rely in our economic life (what Yeats called “getting and spending”) on the other. Doing so may only blind us to the true nature of our current problems — which, I’d argue, aren’t just worries over our economic problems, but which are more deeply rooted in a widespread anxiety and uncertainty about what American life promises and offers.
As Dale Launer, another Economist reader, put it, we’re “spooked.”