I just stumbled on this, and don’t think I’ve seen it anywhere else, so I offer for your consideration economics Nobel Laureate Robert Mundell on the stimulus in a January 9th Turkish TV interview :
Ipek Cem: There is talk of a stimulus package in the US. We also know that the average US citizen is highly leveraged as a consumer. And when we talk about stimulus we are also talking about consumer pending. How to make the two of them, you know work hand in hand?
Robert Mundell: Well there’s a lot of questions about “What a stimulus package really is?” And I don’t think the major has been taken called a stimulus package are going to be much of a stimulus. To a certain extent, monetary policy, an easy monetary policy, is stimulating for us. But that’s not the pack what we mean by a “stimulus package” because “Federal Reserve” can always do that. What they mean by that is government spending. But government spending doesn’t have that bigger effect. If you have a big increasing government spending, without monetary expansion, they have to finance that deficit by bringing bonds. So while the spending adds to demand, the selling of the bonds, takes away the demand. So if there’s a multiplier in one process, there is a negative multiplier with the other process. And the other fact is that the exchange rate is flexible. So if you sell more bonds with a stimulus pending interest rates rise a little bit. And the capital comes in, the current account deficit increases. The trade deficit increases. So a good part of that stimulus package goes to the rest of the world.
Ipek Cem: So what kind of policy measures would you be advocating at a time like this?
Robert Mundell: Well I think that the difficulty of all the banks, they need to recapitalize the bank, which everybody says it’s necessary. And is also true with corporation you need to recapitalize the corporations like “General Motors”, “Ford” and “Chrysler”. The glories, what used to be glories of American capitalism in the 20th century. American manufacturing. They need to be recapitalized, too. And instead of the government taking its stimulus package, the bailout package, recapitalizing, buying stocking these banks, it is much more important to look at what’s happenning right now, what the goverment is doing today to economy. What the government does to the corporation today is take thirty five percent of the profits of the corporation. And without putting anything in. So with the 35 percent of corporate tax, they take all that, draining the corporation from that, without putting anything in. And so what the best thing to do for stimulus is to reduce or eliminate the corporation tax. It is a double taxation anyway, because the capital pays the tax to the corporation and the profits are taxed at the corporate level after 35 % is taken out. And then there are also tax in the individual level. So eliminate it. By the way the revenue isn’t going to be very much because the corporate tax used to earn 5 % of GDP in revenue. It’s gone down about 1,5 % of GDP. So it doesn’t add too much. And in a recession period there won’t be any profits and tax, so the revenue will be very little. So you don’t loose too much, but you would, if you stimulate economy all the other taxes will increase. And the revenue then from the tax cuts of corporations will increase the tax of every other corporation. Just recently, Germany has cut it it corporation tax from 25 % to 15 %. That’s a very good move and that’s what the United States should do. I think, I was going to say from 35 % to 20 %, but it would be even better if they do it to 15 %.
Recap: Bond-financed spending doesn’t much help. Recapitalize banks and eliminate radically reduce the corporate income tax.
I wonder how much less outsourcing would go on if we eliminate or reduced the corporate income tax rate.
Robert Mundell repeats “The Treasure View”.
Complete rubbish.
“Robert Mundell repeats “The Treasury View”.
And unlike the increasingly hysterical Krugman, Mundell got his Nobel Prize for macro not trade theory.
Krugman speaking on macro theory reminds me of Linus Pauling speaking on Vitamin C. Utterly unconvincing.
Didn't Krugman write a successful textbook on macroeconomics in 2005?
Linus Pauling wrote a book about cancer and vitamin C. It was probably successful!
Yes, he did. However, a textbook isn't really analysis, it's a friendly recapitulation. By this standard though, Mankiw would be the better macro guru and they couldn't disagree more.
The real reason he's utterly unconvincing is that he's pretending a huge community of skeptics doesn't exist (I'm looking towards the south side of Chicago here) and ignores their arguments. I'd say you ignore guys like Lucas at your own peril.
If he can't rebut, and breezily dismisses strong arguments with statements like the “dark ages of macroeconomics”, it means he effectively lost the argument. Try that with a 101 econ paper and see what happens.
Look, guys, no need to go for the beheading here. I'm just asking – since he wrote a popularly accepted textbook, it would seem he might know something – even a lot – about the topic. I just see a lot of claims that Krugman knows nothing, but can I just have a link with like, non-ideological evidence? Just to be rational. Cuz this is all waaay above my blondeness. All i can do is ask, ok?
webgrrl, my apologies. I didn't mean to come off as harsh. Sorry.
Sure, let people/corporations keep more of their money. But what incentive do corporations have to invest in a down economy? I think that was one of Keynes' fundamental insights. Government can simply make it a matter of policy.
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Do you think our government can recapitalize banks without recapitalizing the oligarchs?
Note that while I am not a huge fan of Democrat solutions, I observe that they have an easier time engaging with the downturn – perhaps a opportune bias.
Failure of Perception – Reality Ignored
The number of lawyers, or should that be economists, per capita of a society defines the possibility of it being sustainable.
from December 16th post
President-Elect Obama has today named his Energy Secretary with the aims reported below. The failure to peceive reality is tragic, in that the ‘problem’ is not the US’s addiction to foreign oil, but that the US is addicted to fast depleting oil, full stop.
Also the demand side creation of so called ‘green’ jobs from an education system that is not mobilised to create the underlying core skills needed to rapidly develop and deploy, even known sources of renewable energy, is not feasible on the timescale now acknowledged by the IEA. (ditto the UK)
Unless it is recognised that a systemic transformation is required in how we demand and consume energy per capita and unit of production (resource intensity) and mobilise our ingenuity to enable it, we are consigned to enter a low carbon future completely naked; so perhaps it’s just as well our planet is warming!
So this “huge community of skeptics” is … neither very huge, nor (apparently) very skeptical.
Here Mundell re-capitulates the infamous “Treasury View”; that any increase in government spending can't work as it will crowd out an equal amount of private investment.
And for the record: Mundell won his Nobel Prize for his work on international exchange rates (not macro anything). Even more ironically his work on exchange rates involved creating the Hicks/Hansen exchange rate model by projecting the IS/LM model (which is the standard undergraduate way of thinking about Keynes' macroeconomic model) into currency prices.
He completed that work in the early 1960s, and overall it stands up fairly well today. Subsequently though he became an advocate of a simple (and occasionally useful) 'supply-side' view of the world. He derives a lot of his reputation for predicting 'stagflation' after the abandonment of fixed exchange rates in the 1970s, but loses some of that (imo) because European economies (with their highly progressive income tax schedules) subsequently recovered quite nicely thank you very much using conventional monetary policy (thank you, Uncle Milton).
“So this “huge community of skeptics” is … neither very huge, nor (apparently) very skeptical. “
I'm a bit confused, Paul. What are you saying here? Are you saying that there aren't a large number of economists skeptical of a Keynesian framework in regards to the government influencing the business cycle?
Wow, Mundell backs 'the Treasury View' in full force! Long-live Herbert Hoover! The Great Depression really wasn't that bad, it's all a liberal conspiracy, like global warming. Mundell is correct, if the government increases spending, the NIPA savings identity tells us that it simply crowds out private investment. (And there is a lot of private investment to be crowded out these days!) It's just stupid liberals like Paul Krugman that won't admit that increasing debt will merely increase the interest rate — look how much gov't bond yields have shot up in wake of stimulus! (hmm… they're basically unchanged since the Fed controls that… hmm…)
California is doing the right thing, laying off 20,000 workers, and balancing its budget. Will Wilkinson is absolutely right. What America needs is a balanced budget.
http://firelarrysummersnow.blogspot.com/
Jer –
The Oakland Raiders have lots of fans. The web is packed with the testimonies of people who believe aliens abducted them, or that their child's autism was caused by vaccines. One could–and people often do–pack stadiums with those who avow that the world is 6,000 years old or that the Reverend Sun Moon is the second coming of Christ. But relative to the number of people who are NOT Raider fans, UFOlogists, anti-vaccine campaigners, christian literalists or moonies, these people can't be said to represent a 'huge community'. Their existence in sufficient numbers to make up a loud crowd should not lead us to overstate their proportion, nor their influence.
Uncle Milton said it well — “We're all Keynesians now” — meaning that even those who dislike the implications of some of what the Baron of Tilton pulled out of his hat can't help themselves but frame their criticisms using the ropes and pulleys of his apparatus.
Which leads to the second charge; they're not very skeptical. A skeptic understands the position they're arguing against. Mundell clearly doesn't want to engage the argument for stimulus now, just like the anti-vaccine campaigners and Raider's fans don't want to confront the arguments involved in their cases either.
To Mundell, it's all so obvious. GDP = G + C + I. That's domestic production = government spending plus private consumption plus investment/savings. Mundell argues that this accounting identity implies if you increase G, there MUST be a corresponding decrease in I or C, in order to maintain the identity. Therefore, fiscal stimulus can't work.
But the point is that the accounting identity holds post hoc. You'll certainly see, year on year, that GDP = G + C+ I. BUT by increasing G, you change the *behavior *of people. Increase G, and people will have money to spend, to save and invest. (Insert mumble here about velocity of money, as opposed to quantity of money.)
To see why Mundell is peddling nonsense, look at his response to the second question. “Tax breaks for business!”, he says. Holding aside the question of why tax breaks for businesses will change anything when they're all losing money because no one is buying their products, let's examine his argument in the light of his own collection of ropes and pulleys. GDP = G + C + I, right? Mundell says “Drop G! This will increase I!” But applying the ropes and pulleys he assembled in his first answer, this won't have any effect on GDP either (whether or not it's a good idea in the long run, which I tend to think it is).
You can mount all kinds of criticisms of the stimulus package. Using Keynes' ropes and pulleys some (Krugman) argue it's too small. Others (Mankiw) prefer non-spending mechanisms. But none of these folks is arguing against themselves, as Mundell is here.
I just had to say, the giant “Free Government Money — Learn More Now!” ad at the bottom of this post on your atom feed had me laughing out loud. Apparently even the gullible have noticed all the “free” money coming out of Washington these days…
Paul, thank you for the thoughtful reply.
I was not referring to Mundell in my original comment and I agree with your assessment there.
My comment refers to those who seem to believe that a) there is a well settled answer to our current predicament and b) it's so well settled that we simply solve for x, increase effective demand and everything is hunky dory.
What's the multiplier for gov spending? No one knows. What's the multiplier's differential between different types of gov spending? No one knows.
What's the multiplier for tax cuts? No one knows. What's the multiplier's differential between the different types of tax cuts? No one knows.
To what degree is “crowding out” an overly vague term that ignores changes in greater worker specialization? Does spending more on healthcare help employ carpenters? Does building bridges help employ mainframe programmers?
No we have hints towards some of these areas but enough to craft effective counter cyclical fiscal policy?
It's one thing to say that we're all Keynesians now. It's another thing to pretend that we're particularly talented Keynesians.
Jer -
I completely agree with you. We should be very humble about what we 'know'. I'd quip that Carlyle was being to complimentary. Economics isn't any kind of science; dismal or otherwise. Too many things can be assumed away. Too many things can't be held constant.
The situation calls for pragmatism. And really. It's only $800 billion …
I'm much more interested in seeing what's to be proposed for the regulatory scheme going ahead. My personal favorite? A redistributive taxation scheme organized in such a way that never again can a business (financial or otherwise) grow 'too big to fail'. Small business is already the engine room of American commerce. But it's utterly beholdent to the vicissitudes of Big Capital. So – get rid of big capital.
Catchy slogan? Bros and hos before CEOs!
That's an interesting thought, Paul. Someone proposed, in the Journal I think, that stockholders should be able to decide which state a company would be incorporated in, with the assumption that stockholders would choose the states that granted them the most control over management. This might have similar effects to your idea (though it was originally proposed over executive compensation). Would you prefer a mature company continually grow with diminishing ROI or issue a dividend check/repurchase shares? A CEO might prefer the former, an investor might prefer the latter.
A notion in favor of your desired outcome is the idea of the free market as a giant distributed intelligence setting prices and making decisions. If the market works because local nodes have the best local information (and motivation), doesn't an enormous company with far removed upper management resemble the government with a group of central planners?
But isn't the mumble the nub of it.
Increase G and you might get higher interest rates, more public debt, inflation, Ricardian equivalence will kick in, etc.
Why do you assume that the behavioral changes will lead to economic growth in the long-term (woops, forgot we are all Keynisians now)?
“doesn't an enormous company with far removed upper management resemble the government with a group of central planners?”
Amen! Testify!
Yes.
My suspicion (No guru! No teacher! No method! No data! Pure conjecture!) is that information technology MAY lower search costs and transaction costs to the point that loose, more fluid organizational models can work for industry, and that a broader, portfolio based approach to individual investment can maximize our individual return on savings. But to be “on the safe side” …
“Why do you assume that the behavioral changes will lead to economic growth in the long-term (woops, forgot we are all Keynisians now)?”
Actually, I don't. I don't think Keynes did either. I'm personally convinced that longer term technological and geo-political realities utterly trump a decade's worth of public policy.
But in the short term, unemployed people are miserable and become … collectively awful. Keep 'em busy! Give them opportunities for personal development according to their effort! Spend a little money on em. When times are good, Keynes would argue, we rein in public spending relative to revenue growth. And the 1990's provides some historical evidence that this can be done, for all the failings of our republican democracy.
That's an interesting thought, Paul. Someone proposed, in the Journal I think, that stockholders should be able to decide which state a company would be incorporated in, with the assumption that stockholders would choose the states that granted them the most control over management. This might have similar effects to your idea (though it was originally proposed over executive compensation). Would you prefer a mature company continually grow with diminishing ROI or issue a dividend check/repurchase shares? A CEO might prefer the former, an investor might prefer the latter.
A notion in favor of your desired outcome is the idea of the free market as a giant distributed intelligence setting prices and making decisions. If the market works because local nodes have the best local information (and motivation), doesn't an enormous company with far removed upper management resemble the government with a group of central planners?
But isn't the mumble the nub of it.
Increase G and you might get higher interest rates, more public debt, inflation, Ricardian equivalence will kick in, etc.
Why do you assume that the behavioral changes will lead to economic growth in the long-term (woops, forgot we are all Keynisians now)?
“doesn't an enormous company with far removed upper management resemble the government with a group of central planners?”
Amen! Testify!
Yes.
My suspicion (No guru! No teacher! No method! No data! Pure conjecture!) is that information technology MAY lower search costs and transaction costs to the point that loose, more fluid organizational models can work for industry, and that a broader, portfolio based approach to individual investment can maximize our individual return on savings. But to be “on the safe side” …
“Why do you assume that the behavioral changes will lead to economic growth in the long-term (woops, forgot we are all Keynisians now)?”
Actually, I don't. I don't think Keynes did either. I'm personally convinced that longer term technological and geo-political realities utterly trump a decade's worth of public policy.
But in the short term, unemployed people are miserable and become … collectively awful. Keep 'em busy! Give them opportunities for personal development according to their effort! Spend a little money on em. When times are good, Keynes would argue, we rein in public spending relative to revenue growth. And the 1990's provides some historical evidence that this can be done, for all the failings of our republican democracy.