An Economics Nugget from "Like Clockwork"
In last week's Ricochet Podcast 81, "Like Clockwork", near the end (57:25), Peter Robinson asks John Taylor an amazing question. It kind of hard to lock on to because it's so tightly packed and it goes by so quickly. If you were distracted for just a moment you may have missed it. So I've transcribed it here.
(Ed. Note: audio added)
Peter Robinson:
This is my last question. And it's a question that I'm going to ask you to assess your own mind and character. And here's why... We talked a moment ago on this podcast to Bill McGurn, and Bill said that he lives in fear of smart people, of intellectuals, and Rob made a quip, which I actually think, like a lot of Rob Long's quips, quite profound: Looked at in one way, the constitution of the United States is nothing but a document that says, "Not so fast, Mr. Smarty-pants".
You are a professional economist. You have all kinds of honors as an economist. When our listeners to this podcast, google John Taylor they'll discover that you are at the top of your profession.
Let me name some other people that are at the top of their profession: Alan Blinder at Princeton, Paul Krugman at Princeton, Larry Summers at Harvard, these are all accomplished economists and they all say, "Keynes, Keynes, Keynes. The problem with the $800 billion stimulus was that it was too small. The problem with the Fed policy now is not that Ben Bernanke engaged in Quantitative Easing Round 2, but that he's being hesitant about engaging in Quantitative Easing Round 3. The problem with the federal budget is not that we're spending too much but that taxes are too low."
Why is it that the Keynesian impulse among intellectuals is so persistent, and why is it that a few people... what is it about you, John Taylor, and our friend and colleague at the Hoover Institution, Gary Becker, and when he was still with us, Milton Friedman... It seems to me it's almost a question of character, or somehow a fundamental moral outlook that permits people to say "No!" to Keynes, rather than economic analysis. What permits you to stand up to Larry Summers and say, "Larry, you're full of it."?
John Taylor:
I actually just look at the facts, I think you know... He says he looks at the facts, too, I'm sure. But the truth is there have been many, many studies of the impact of Keynesian economics. In fact, let me put it this way, there was a consensus among economists by the end of the 90's or even earlier, in the 80's, that these Keynesian strategies didn't work. They're just too much intervention. You saw the mess in the 70's. And of course you now go back and argue the same thing was in the 30's in terms of intervention; that was the problem not the solution. So there is a lot of evidence. There are also a lot of economists, by the way... A very famous paper written in 1978 called "After Keynesian Economics". One of the authors won a Nobel prize, Robert Lucas. You have other Nobel prize winners, Ed Prescott, who feels strongly that these Keynesian things don't work. So I can give you a whole long list of respected economists on the other side.
But to answer your question, which is an important one, and I don't know the answer. But I'd say part of the attractiveness of Keynesian Economics, and Milton Friedman wrote about this, is that it gives something for government to do. It gives a sense of power: "We can do these things." And it's a great temptation to use that. You can see the appeal: "Oh, we can dig holes in the ground." "We can waste our money, and it's going to be good for the economy." It's a great appeal. And I think that's what tends to make people go in that direction.
And unfortunately, recently, the other views, maybe you'd call it the Chicago school or whatever it is, hasn't had as much influence in the government as it used to, as in the 80's. Many of Reagan's appointees came from those schools. In recent years you don't see as many appointees in that area.
Wow, that's impressive.
Now, I am not an economist, I'm an engineer, so I naturally look at things from more of a science / math / building things perspective. And I've been studying economics recently because I find it fascinating, and because it's been in the news.
This exchange, both the question and the answer, appears to shed some light on the foundation of economics. A fundamental mechanism of how the field of economics operates that seems pretty clear to me, yet I haven't seen it covered. Maybe call it "meta-economics", or, "do economists themselves respond to incentives?".
I have a lot more I could say about this, but I wanted to get it out here for some discussion first.
I will suggest that Dr. Taylor's point, "It [Keynesian economics] gives a sense of power." might be amplified a bit. To something like, "It delivers an enormous amount of unchecked power."
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Jul '11
Re: An Economics Nugget from "Like Clockwork"
Thanks for the interesting post - I didn't listen to the podcast you refer to, but I'll make time for it soon.
Your perspective on economic questions sounds similar to my own (we're both in science/engineering fields), so let me highly recommend a book that I found fascinating. Richard Posner's "The Crisis of Capitalist Democracy" is a detailed critique of the government policies leading up to and in response to the Fall 2008 financial crisis. One of the interesting aspects of it is that Posner, while generally a free marketer on economic matters, defends Keynesian policies and explains their logic in a manner that is free of any partisan overtones. I'm not saying I agree with his overall analysis, but if you're interested in a substantive and challenging treatment of these questions, you won't find a more rewarding book.
If any Ricochetarians know of some interesting critiques of Posner's work on these questions, they'd be greatly appreciated.
Edited on Aug 18, 2011 at 6:15amJun '10
Re: An Economics Nugget from "Like Clockwork"
Thank you for transcribing this. It's terrific, and even though Taylor fits the "smarty pants" definition, the simplicity of his answer is perfect. I may give this podcast a listen.
Jul '11
Re: An Economics Nugget from "Like Clockwork"
On the widespread appeal of Keynesianism among economists, here are couple of hunches. Activist government is appealing to politicians because it's immediately popular with voters ("Look! We're doing something!"), even if the longer term consequences may be worse than the original problem. Its appeal to economists is less obvious but may ultimately have similar roots (although some ... cough, Krugman, cough ... have devolved into simple partisan hacks). An activist government places economists in favor of such activism, be they in academics or the employ of the government, closer to the center of power. That's awfully seductive on a number of levels. On the flip side, economists in favor of limited government are unlikely to find themselves controlling much if their ideas are implemented (there's simply less to do). The result would be bias in favor of Keynesian interventionism.
Another possibility would apply to intellectuals more generally. Ask yourself, what weakness do many intellectuals suffer from? Hubris. They've heard all their lives that their intelligence equates to wisdom, so humility is a rare commodity indeed. The resulting activist impulse is natural: the world's problems would go away if only their team was in charge ... of everything!
Dec '10
Re: An Economics Nugget from "Like Clockwork"
Yes, Cobalt Blue, you've nailed it. The scary thing to me is, the hubris and post-modernist will to power has spilled over into what used to be considered the "hard" sciences, not just the dismal one. My nephew is a space science physicist in New England and has been for more than a decade now. He's mostly been funded by NASA grants. He recently came under a new, younger, project lead who criticized his writing style. It's too clear and lacks the post-modern flim-flammery this guy prefers (interesting Forbes article about writing here).
This degradation has happened in climate science (all socialist policy prescriptions all the time), evolutionary science (explains everything), and medical science (fetal versus adult stem cell research). The question science is answering these days doesn't seem to be so much, "what's true?" or "what works?" as "what advances the Left's agenda?"
Great post, Don!
Sep '10
Re: An Economics Nugget from "Like Clockwork"
Peters question is what permits people to say “no”, to Keynes. Taylor tries to make clear he attempts to draw his conclusions from looking at facts. I have not read much of his work, but I am fairly certain he does not reject all of Keynes’s ideas nor does he accept all of Friedman’s. Peter is asking basically a political not an economic question. Taylor gives an insightful answer to the political question of what is attractive to politicians about Keynes’ ideas. One should note that Bush followed a Keynesian approach. I doubt if he took the time to inform himself about it. TARP was 100% Keynesian but was indorsed by the GOP establishment that is railing against Keynes now. It seems their position is when things are real, real bad we should follow the advice of Keynes, but reject it when things aren’t so bad. Democrats endorse Keynes and practice political cronyism. Republicans reject Keynes and practice political cronyism. What goes on in Washington has little to do with ecconics.
Jun '10
Re: An Economics Nugget from "Like Clockwork"
The alternatives to Keynesian counter-cyclical methods are variations on classical laissez faire economics with a monetarist fillip which is, at base, "these things happen, the market will straighten itself out if left alone and you keep the money supply at the right level"
Keynesianism may be the economist's equivalent of blood-letting by 17th and 18th century physicians. There can have been no evidence that blood-letting did any good, other than perhaps a placebo effect, but the consensus was so strong that a physician who declined to let blood and frankly stated that he had no idea what to do would not have prospered.
In fairness, the Keynesian theory was based on deficits, not debt. One should "cool" the economy when demand is expanding too rapidly by creating budget surpluses and "stimulate" a flagging economy by releasing the savings by budget deficits. It is not "Keynesian" to run up large debt in the periods of growth and even larger debt in recessions. If that was the route to prosperity, Argentina would be a world power.
Apr '11
Re: An Economics Nugget from "Like Clockwork"
The curious thing is that there are other economic schools that offer tools for "improving the economy", but the tools mostly consist of getting government out of people's way. They work, but they are not universally attractive. That suggests that selection is biased by ideology and character.
It is a basic Fascist/Progressive/Liberal tenet that ordinary people have heads that are full of cotton, hay, and rags, and that their vision is clouded by ignorance, self-interest, and parochialism. If society is going to work well and "progress", its management must be ceded to smart people who are specially trained both to react to present needs and to implement visionary schemes of improvement; this is much more efficient and effective than having the aforesaid benighted clunkers muddling through within the constrains of a 200-year-old "Constitution".
So it isn't just ad hoc self-interest and/or adolescent arrogance that makes Keynsianism attractive to smart people with special training. If Keynesianism didn't exist, Progressives would have to invent it...which, come to think of it, they did.
Re: An Economics Nugget from "Like Clockwork"
The attraction of Keynesian economics is simple. It tells the economist and the policy-maker what they want to hear: that they and they alone have the wisdom to direct the machine. What makes Hayekian economics far less attractive is that it does not appeal to the vanity of the experts. It tells them that no one has the wisdom to direct the machine and that fiddling with it in the manner they have in mind will make its operations considerably less efficient. It claims that the market is itself a system for collecting and testing information, that it is a system of trial and error that corrects itself quite rapidly, and that central planning distorts price signals, produces ignorance, and gives rise to folly. What self-regarding economist and policy wonk would want to hear that?
Jan '11
Re: An Economics Nugget from "Like Clockwork"
It just seems to me that during times of plenty, there is tremendous pressure for the government to spend (often on silly programs) - after all no politician wants to look like a mean miserable miser.
During times of want, there is also tremendous pressure for the government to spend, for a variety of social and structural reasons. This is often excused as "Keynesian" - the former goes unnoticed.
Jun '11
Re: An Economics Nugget from "Like Clockwork"
Great post Don. And I thought Peter did a masterful job slowing down the conversation and asking the question. One more minor point.
Thomas Sowell was asked basically the same question from Dennis Prager on Dennis' show a while back. It was structured more to the tune of why Sowell and Paul Krugman were so different in their economic view. Sowell answered that in their public life, media personalities stake out a position and a persona that represents a view. They personally may or may not be convinced of their position that they use to in essence to "make a living".
My interpretation: If it does not make economic common sense (ie, spend your way to prosperity), then the messenger is an economic hack.
Re: An Economics Nugget from "Like Clockwork"
Marvelous post, Don. I'm a little embarrassed about the length of my question--I really did yammer on--but John's reply is just wonderful.
Sep '10
Re: An Economics Nugget from "Like Clockwork"
Thanks for the post, Don.
Have you listened to EconTalk (econtalk.org)? Russ Roberts does a great job interviewing economists such as Taylor as well as economist/political scientist Mike Munger of Duke, "The Black Swan" author Nassim Taleb, and even economic actors such as the owner of a hair salon and the director of a hospital. All the podcasts he's done in the past 5-7(?) years are available at the site or on iTunes.
Maybe the Ricochet-ers should consider having Russ on a podcast soon - so long as they get around to interviewing to Rep. Jim Jordan (R-Urbana, OH) first!
Sep '10
Re: An Economics Nugget from "Like Clockwork"
Thanks for the post, Don.
Have you listened to EconTalk (econtalk.org)? Russ Roberts does a great job interviewing economists such as Taylor as well as economist/political scientist Mike Munger of Duke, "The Black Swan" author Nassim Taleb, and even economic actors such as the owner of a hair salon and the director of a hospital. All the podcasts he's done in the past 5-7(?) years are available at the site or on iTunes.
Maybe the Ricochet-ers should consider having Russ on a podcast soon - so long as they get around to interviewing to Rep. Jim Jordan (R-Urbana, OH) first!
Nov '10
Re: An Economics Nugget from "Like Clockwork"
“Keynesianism” keeps progressing so that Keynes himself might hardly recognize it. It will continue to evolve into little more than a hideous mutation of what its original author intended because it is such a convenient justification for all sorts of activism by the political class. Once intervention into the economy is taken for granted barriers come down to allow much more intervention into every other nook and cranny of our lives. Once we believe the government must run the economy we can more easily believe the government has to run our health care, our light bulbs, the kind of fuel we can put in our gas tanks, the sort of toilets we can have, even our children’s lemonade stands must be regulated by the elite in Washington D.C.
Keynesianism is no longer just an economic theory; it is the political genie that grants all the wishes of politicians and bureaucrats.
Edited on Aug 18, 2011 at 10:32amApr '11
Re: An Economics Nugget from "Like Clockwork"
I'll second the suggestion of Russ as a guest. The music videos he co-created about the Keynes/Hayek competing views on recessions and stimulus contain the best arguments from both sides. Here is the most recent one.
http://www.youtube.com/watch?v=GTQnarzmTOc
Jun '10
Re: An Economics Nugget from "Like Clockwork"
I think voters deserve a share of the blame as well. Voters want candidates to "fix the economy" and "create jobs." A candidate who embraces Keynesian economics can offer a plan (e.g. the Stimulus package) to do just that. A Hayekian candidate faces an up-hill battle trying to explain to voters that business cycles are inevitable and we should do nothing and wait it out.
Re: An Economics Nugget from "Like Clockwork"
Just now received a reply from John, who read Don's wonderful post. He writes:
Jun '10
Re: An Economics Nugget from "Like Clockwork"
TARP was Keynesian? How so? Keynes' theory was based on the idea of managing aggregate demand. Government can smooth out the business cycle by spending more and taxing less during a recession, and then prevent the economy from overheating by cutting spending and raising taxes during a boom (though this latter prescription is rarely followed).
I don't think TARP as originally conceived had anything to do with stimulating aggregate demand, the idea was to bail out banks that were "too big to fail" by purchasing "toxic" assets. Call it "Paulsonian" economics if you like, but I don't think we can blame that one on Keynes.
Aug '10
Re: An Economics Nugget from "Like Clockwork"
Friedrich Hayek suggested another form of bias: What he called "scientistic thinking." Economists want to be scientists, not philosophers. They want to bring the tools of mathematics to bear on economic questions. But the economy is a complex system that bears more resemblance to an ecosystem. How do you reduce that to mathematics?
The answer is to deal in aggregates. Abstract away the complex underlying structure, and just put numbers to the sum totals of demand, supply, and labor. Now you can build curves, run regressions, sift the data looking for patterns, build models, and treat the economy like a proper scientist would.
The problem as Hayek saw is was that you can only do this by abstracting away the stuff that's actually the most important - the underlying real factors that drive the economy. The economy consists of complex webs of interaction driven by local knowledge locked up in the heads of economic actors. It simply cannot be centrally planned or manipulated efficiently by mucking about with aggregate values, no matter how scientific that may seem. Attempts to do so will break the fine structure underneath, and inject noise into the signals of the price system which coordinate activity.
Aug '10
Re: An Economics Nugget from "Like Clockwork"
TARP was not an implementation of Keynesian economics, but Bush's 2001 tax cuts were. If you'll recall, the idea was to 'put money in the pockets of the people' so that they would go out and spend it, thus propping up aggregate demand. It didn't work: people just saved the money.
Alan Greenspan engaged in Keynesian policy even though he didn't think he was - he thought he could maintain artificially low interest rates because the nature of the economy had changed - the internet was adding new efficiencies that had permanently moved the slope of the growth curve upwards, and therefore a looser money supply was warranted. He was wrong, and his loose money supply created false growth by inflating an asset bubble in real estate and a speculative bubble in derivatives.
Bush's 2003 tax cut was mostly supply side, not Keynesian. It largely consisted of cuts to capital gains and dividend taxes.
Bush also borrowed and spent a lot of money, which would act as a Keynesian stimulus.
Edited on Aug 18, 2011 at 11:50am