Accounting Identities and Straussian Economics
Like Paul Krugman and Brad DeLong I’ve been a bit puzzled to see the number of seemingly well-qualified economists arguing that debt-financed government spending necessarily crowds out private investment on a one-to-one basis. I’m pretty sure this was covered in the AP econ class I took in high school. The giveaway phrase in ordinarily English seems to be “the money has to come from somewhere” which elides the difference between money just sitting around (”somewhere”) and circulating via economic activity.
Read the linked posts for an explanation, or else see this old Paul Krugman article offering a parable about baby-sitters that both illustrates the point and shows that this isn’t just an idea liberals made up last month to justify the Obama administration’s spending plans.
My best guess is that the leading figures making this argument aren’t actually confused about the issue so much as they are engaging in a Straussian gambit of some kind.
49 Responses to “Accounting Identities and Straussian Economics”
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January 27th, 2009 at 10:39 am
My best guess is that the leading figures making this argument aren’t actually confused about the issue so much as they are engaging in a Straussian gambit of some kind.
My best guess is that conservatives vastly overestimate their understanding of economics, and end make making arguments equivalent to a physics student who thinks the first two chapters of his text boot prove that heavier than air craft cannot fly.
Sigh. You need to take Econ 101.
January 27th, 2009 at 10:40 am
The funny thing is that even in real classical models there is no one-for-one crowding out of private investment by government spending. What you are seeing here is a mixture of two things:
a) non-macroeconomists trying to macro (Fama for instance).
b) people who do somewhat understand the real issues trying to oversimplify to communicate with the public. (Lucas for instance)
Crowding out and private sector and government budget constraints are an important issues for understanding how government spending and how it is financed affects the economy.
January 27th, 2009 at 10:47 am
In the long run in the mainstream economic model, the economy tends toward full employment, and under full employment, using resources for one purpose has the opportunity cost that they cannot be used for another.
Of course, nobody lives in the long run … we always live in a succession of short runs. And even among those who imagine that the mainstream model really applies, large numbers recognize that right now and for the immediate future, we are so far from full employment that the opportunity cost of more government spending is very low.
Obviously the stimulus bill would be better with only the promised long term tax cuts in it, and filled up with all the ready to spend needed infrastructure spending … but it could in fact be all painting the bottoms of rocks in decorative landscaping in the park, and there’s still be very little long term economic cost to it.
Of course, new road construction is an exception there, because it will be a drag on state and local road maintenance budgets over the long term, while work on the existing capital works backlog – even on roadworks – while be a long term benefit for state and local governments.
January 27th, 2009 at 10:55 am
I think Krugman’s Slate article is about monetary policy rather than fiscal policy
January 27th, 2009 at 11:03 am
What bruce said. In the long run, economic performance is better if you balance the budget so that investment is cheaper. This is howq Clinton got his boom (despite confident predictions from the GOP that it couldn’t happen.
But in the short term, we are in an emergency and don’t care about this. We just need to give the economy a jolt.
January 27th, 2009 at 11:06 am
in fact, dtm, just to follow up on your point, what lord keynes wants us to do is use fiscal policy counter-cyclically over the business cycle so that it’s neutral over that span.
January 27th, 2009 at 11:06 am
R “the leading figures making this argument aren’t actually confused about the issue so much as they are engaging in a Straussian gambit of some kind.”
—————-
“Straussian”? Hmmmm.
Hey, wasn’t he the guy who promoted the idea of the Noble Lie?
January 27th, 2009 at 11:12 am
Economic ideas are very important in politics. That is why, over the last 30 years or so, the plutocrats made a concerted effort to ship liberal economists off to Siberia. Today most “mainstream” economists are rightwing hacks.
This article by James Galbraith is interesting:
http://www.washingtonmonthly.com/features/2009/0901.galbraith.html
January 27th, 2009 at 11:14 am
Some day, we’re going to come out of this recession. Some day, we’re going to have a very strong economy, and begin running surpluses. We’re also going to have a national debt that can be seen from space.
When that happens, it would be wicked awesome if the people on the right howling about deficits, particularly the Austrians, could be induced to remember what they’ve been saying for the past three months and to support a big debt paydown, instead of blithely asserting that “Reagan proved that deficits don’t matter” and shilling for tax cuts.
January 27th, 2009 at 11:27 am
thanks for the old Krugman article. Good stuff. Always apreciate the good links.
January 27th, 2009 at 11:34 am
Of course, there will be those saying, “now is the time to pay down the debt”, but since the political hacks will still be working for the corporations, and the corporate quarterly results will still look better from juicing up the recovery in unsustainable ways, those saying “now is the time to pay down the debt” will simply be ignored.
If we have sustainable engines of growth in the economy, then we can of course run a sustainable deficit over the course of the business cycle … the average deficit as a share of GDP simply must be less than the average rate of growth of the economy.
However, the debate between a cyclically balanced budget and a cyclically sustainable budget is a distinction without a difference in current economic conditions … this is the time to be exhausting all available useful government investments, supporting structurally balanced state and local budgets with the cyclical deficits that they cannot run on their own account, and then adding enough government consumption to fill a big chunk of the output/capacity gap.
If we were going to be making permanent changes in tax policy, this is a time to frontload the tax cuts and implement the tax increase to be deferred through the recession and phased in through the recovery.
The debate on whether we should be balancing the budget halfway through the recovery or at the peak of the recovery doesn’t really modify the pragmatic features of a beneficial stimulus package under current economic conditions.
January 27th, 2009 at 11:35 am
There is still no reason to stop assuming that economists who write popularly in favor of conservative assumptions and market fundamentalism have stopped lying (and whether that be conscious lying to us or lying to themselves is uninteresting to me).
It will be nice if we ever reach such a day, but it has not happened yet.
January 27th, 2009 at 12:03 pm
Though Strauss did write a book about economics – Xenophon’s Socratic Discourse: An Interpretation of the Oeconomicus. Strauss does seem at least willing to consider Xenophon’s economic theories seriously, and Xenophon’s economics is greatly in conflict with all modern economics (even more so than Aristotle is). If anything, Xenophon’s economics is closer to Plato in the Hipparchus than any other major ancient philosopher, and thus is probably on the anti-capitalist end of major thinkers. (Xenophon never endorses communism – Plato does – Xenophon however does argue for very active government control over economic activity). Xenophon was perfectly willing to endorse government stimulus and even nationalization of various key enterprises – see his Ways and Means. It’s probably safe to say that Strauss was willing to examine critically the foundations of modern capitalism.
January 27th, 2009 at 12:40 pm
Yes, they are liars.
It’s important to remember that economists of this sort are being paid to not believe in economic stimulus packages. Their monetary self-interest precludes any possibility that they stipulate what is an ordinary fact from first year economics. It is impossible that they are so breathtakingly incompetent. Rather, they are simply trying to lock in an economic structure imposed on us by the Bush years.
Monetary elitists (aka aristocrats or plutocrats) understand that in any kind of democratic government their ideas of class are not going to be popular enough to win elections. So they lie. Constantly and egregiously.
January 27th, 2009 at 12:57 pm
Gambit and habit. All things being equal in classical economics having no government debt would be good. However carried to it’s extreme if the US Treasury didn’t have any debt we wouldn’t have any money. Money is debt in our system.
Note too they expend all their rhetorical ammunition on the StimPack and auto bailouts not on the trillions expended worldwide on buying up crappy paper.
I am an opponent of this plan but that’s beside the point, this point.
January 27th, 2009 at 1:02 pm
It seems clear that many of these economists are “lying or stupid” (quite possibly self inflicted brain damage as a career move). I wouldn’t have the confidence to say this myself but the fact that Krugman, DeLong and Daniel Davies agree 100% is enough for me.
Also of course they are very publicly taking this position as “authoritative voices” in a critical public debate. So they can’t plead the various forms of innocence that apply in more academic contexts.
I do hope we can find a term for this sort of “motivated stupidity and/or lying”. We shouldn’t waste our time trying to figure out what the combination is. The important take away is that this person is serving some slimy political goal, not that of good policy or honest inquiry, and should be shut out of civilized discourse forthwith. I guess if they make a restrospective analysis of their work that shows they understand how they were used and reject that option for the future they could be readmitted. A good example of this is maybe David Brock, who wrote Blinded by the Right.
January 27th, 2009 at 1:06 pm
duBois, January 27th, 2009 at 12:45 pm
You know, like the private money Citibank spent on a new corporate jet. Private money is the money senior executives are free to spend any way they want, and public money is money they get so that the consequence of the way they spent the private money does not do quite as much damage.
January 27th, 2009 at 1:31 pm
Thanks. “Bullshitter” is OK, something that could be used on the air would be better.
As a bonus from the Frankfurt analysis we can say of these people “They do not care whether the things they say describe reality correctly.” This strikes to the heart of their position since their influence depends on their “objective” stance. It will be especially disturbing to these economists who make a big deal of their “rationality”.
The distain for “ugly facts” certainly fits much of neoclassical economics, even when not so overtly polemical.
January 27th, 2009 at 1:40 pm
I sometimes forget these days that Krugman and Greenspan used to be BFF’s.
January 27th, 2009 at 1:45 pm
If we have sustainable engines of growth in the economy, then we can of course run a sustainable deficit over the course of the business cycle … the average deficit as a share of GDP simply must be less than the average rate of growth of the economy.
This is wrong, but more because of politics than economics.
The default mode of politicians is deficits. Republicans want to cut taxes and not pay for the tax cuts, and Democrats want to raise spending and not pay for the spending.
Thus, as we saw in both the 1980’s and 2000’s, the tendency will be to run huge deficits in good times, which certainly will crowd out investment as well as make it more difficult to create an effective stimulus when a recession does hit.
The only way around this is to create pressure to actually balance the budget or run surpluses. We will still deficit spend out of necessity in bad times, but this should be understood as temporary and we should follow Clinton/Eisenhower fiscal policies most of the time.
Because politicians don’t care about whether the deficit is theoretically manageable in the economy. They only care about the free lunch.
January 27th, 2009 at 2:15 pm
I now believe that John Locke was wrong about his “spoilage” argument, i.e. one is justified in using property before it spoils, such as food, or should be prohibited from hording same. Locke said the invention of money, which he claimed wouldn’t/couldn’t spoil, countered the spoilage argument. My thinking is now that horded money does indeed spoil if it is not used to do what money is supposed to do, which is act as a means/medium of exchange to distribute otherwise incompatible or incommensurate use values. Looking at our economy today, I think one can argue that our money has “spoiled”. This supports my argument that money is only incidentally “private property” and is primarily a “public utility.” Further, this monetary spoilage has been aggravated by the deployment of money as a weapon of domination instead of a tool of contributive justice and liberty.
Here’s a modest proposal I made recently on DKos. I think a global economic transvaluation is currently underway. The hollowing out of the use value of money, i.e. its “spoilage”, by its being abused, indicates that it is now time to replace the abstract “exchange” use-value of money (to manipulate/transform Marx’s concepts) with a real, concrete basic unit, that is, the human individual as the basic unit of use value. I think this would help end the wage slavery of humanity to our benevolent corporate overlords, while simultaneously reminding us where all value comes from, name human beings that have the power to value. Further, such a change would challenge “growth” as the end-all, be-all of economic theory and provide impetus to replace it with “development” as the hallmark of the amplification of value.
Just sayin’.
January 27th, 2009 at 2:50 pm
If you’re already looking forward to a job with the next GOP administration what better way to get some chops early than to jump into print with some pseudo-scholarly BS attacking Obama’s stimulus plan?
We’ve long since gotten past the truth/truthiness/stupidity/Straussian agendas conundrums.
It’s all about positioning and networking.
January 27th, 2009 at 2:57 pm
I think Krugman’s Slate article is about monetary policy rather than fiscal policy
It certainly is. There is no analogy to the “stimulus package” in Krugman’s story. So I’m not sure Matt’s citation here is appropriate. Not that it isn’t a great story.
Krugman does offer the the monetary solution, which is to print more scrip…or at least threaten to print more scrip.
But maybe we could enhance the story with a new solution: management could hire people to babysit…i.e., rent a room and pay some parents scrip to sit in it. If other parents drop their kids off, so much the better.
Did I get that analogy right?
January 27th, 2009 at 3:01 pm
I think I got the monetary solution analogy wrong. Krugman’s answer to the liquidity trap (in the context of the co-op) would be devaluing–or threatening to devalue–the scrip (i.e., legislating that one unit of scrip would now become worth 1/2 an evening of babysitting)…not printing more of it.
January 27th, 2009 at 5:39 pm
What the hell is a “Straussian gambit” ? I know who Leo Strauss is. He’s not a very important figure. Some neocons decided it was fashionable to name check him. But they completely distorted his work. It was an intellectual veneer applied to some weird crap that had nothing to do with Strauss’s actual writings, which are weird enough on their own. Now, apparently, progressives have decided to distort the distortion and use Strauss as some sort of bugbear. The whole thing is just bizarre.
Also, Don Williams, I hope you’re kidding when you ask if Strauss coined the Noble Lie. That was actually some much older guy who wrote some obscure Politeia book.
On a more substantive note, Bruce writes:
“In the long run in the mainstream economic model, the economy tends toward full employment. . . .” That’s true of the “Classical” model, but I’m not sure I’d call that “mainstream” anymore. In the Keynesian model the economy can reach equilibrium well below full employment. I think Keynes considered that a structural failure of the capitalist system, not just some temporary feature unique to downturns in the business cycle that would even out over time.
January 27th, 2009 at 6:02 pm
Nobody knows anything scientific about macroeconomics. Macroeconomics isn’t a science. There aren’t rightwing and leftwing chemists. So a leftwing macroeconomist accusing a rightwing macroeconomist of lying, or vice-versa, is just sound and fury signifying nothing.
With macroeconomics, things work until they stop working, usually because the public finally figures out it’s being fooled. For example, the Keynesian Philips Curve — the idea that you could fool the economy into higher employment via inflation — worked great in the 1960s, but failed badly in the 1970s because people caught on to out how they were being cheated by inflation.
Similarly, nobody knows for sure whether blowing a lot of money on changing lightbulbs and filling potholes will help or hurt the economy in the short run, much less the long run.
January 27th, 2009 at 8:39 pm
My guess is the other one, that they are confused. Niether Fama nor Cochrane is a regular partricipant in the political debate. They seem to care a lot about their academic reputations compared to their influence on policy (which is minimal). I think this episode will be very damaging to their reputations.
So how can they be confused ? Well I think the reason is that they have been taught and have taught for decades that the stuff you learned in your ap class is not just wrong but obviously and fundamentally wrong, something like the theory that disease is caused by an imbalance of humors and not like the Ptolomaic model which, you know, is useful if you want to predict where planets will be in the sky.
All Keynesian arguments are anathema even the ones that are obviously true.
Think of Chicago economics as a religion. Sincerely religious people often have beliefs which seem very odd to people of other faiths and non-believers. Now Straussians claim to have such odd beliefs so it is hard to tell, but my guess on this one is that they are sincere.
January 27th, 2009 at 9:35 pm
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January 27th, 2009 at 9:35 pm
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January 28th, 2009 at 8:05 am
LEO STRAUSS IS AN IMPORTANT FIGURE IN CONSERVATIVE IDEOLOGICAL HISTORY
TSW, above, pretends to know what they are talking about, or are themselves engaging in Straussian behavior.
Strauss’s ideas have been vigorously adopted by some of the elite conservative thinkers that push much of the right-wing’s agenda.
Leo Strauss is one of the University of Chicago boys that pushed a deceptive system of ideology that had plans within plans. The plans they told the public were not the plans they intended. And that was precisely the plan.
The public consumption of Strauss’s outward plans enabled the inner plans. And in some senses, while he was generally a private person, Strauss himself was quite up front that the general public needed to be manipulated by elites by the use of simplistic ideologies (the outer plan) so that their master, secret, inner plan could be enabled.
Part of Leo Strauss’s belief system was clearly crystallized by his growing up as a German as a Jew until 1938. He was a patriotic German, having served in World War I. He subsequently went on to receive a Ph.D. in political philosophy before leaving for America in 1938.
In many senses, Leo Strauss is one of the forefathers of the current neo-conservative movement (and himself a student of Machiavelli). The neo-conservatives blend a liberal belief in the use of government power, but for purported “conservative” ends. The trick is that the “conservative” ends are for the elite to know and the means by which those elite conservatives empower themselves is to push a simplistic ideology for the masses that in turn empowers the elite.
The perverse part is that the masses may or may not be served by the inner plan of the Straussian elites. Because of the authoritarian nature of Strauss’s ideology, the belief that the elite (the philosopher kings, if you will) should rule, it reinforced a central part of what’s been empowering conservatism. The masses of conservative adherents largely implicitly trust their leaders because they’ve been convinced that their leaders, and only THEIR leaders, are the GOOD and everyone else is the BAD. The outer plan of Straussian ideology doesn’t do nuance. Nuance is left for the inner circle of elite thinkers pulling the strings, and who themselves can indulge in BAD behavior because they, as the GOOD, cannot ever actually BE BAD.
Strauss provided the intellectual framework for the conservatives to use deception even amongst their own adherents in order to further empower themselves, usually by convincing themselves, or at least everyone else, that it was for the greater good. So because of the implicit trust in the goodness of the authoritarian leaders the masses can suddenly be convinced that torture is good, working the “darkside” is crucial, that everlasting war (in this case against terrorism, which is effectively a forever war) will somehow bring peace, that somehow absolute surveillance is freedom, and that keeping people ignorant of what the absolutely trustworthy elite in authority are doing is somehow a strength of the followers.
In short, Strauss provided the intellectual framework for the generation of right-wingers following his ideology to convince right-wing Americans that “War is Peace,” “Freedom is Slavery,” and “Ignorance is Strength.” Those were the three slogans of the “Party” in Orwell’s book 1984 that were emblazoned on the side of the Ministry of Truth, or “Minitrue, in Newspeak.”
It’s quite brilliant in a sick, un-American, anti-democratic, and completely elitist kind of way.
The accusations that a right-winger appears to be engaging in a “Straussian gambit” suggests that they are being Machiavellian in their use of deception and that their “outer plan” may not be what their “inner plan” is.
For instance, much of what one of the other University of Chicago boys, Milton Friedman, advocated was a system that on it’s face claimed that it would provide more “freedom” but then was systematically employed by brutal right-wing dictatorships who employed torture, surveillance, and fear to crush any opposition. Sound familiar?
While Friedman dealt with the economic philosophy, much of the current conservative political philosophy can be laid at the feet (though certainly not exclusively) of Leo Strauss.
It’s noteworthy that Obama himself was a student of the University of Chicago and that many of the people he’s empowering in government are friends of his from the University of Chicago, most notably Cass Sunstein, who advocates a very Milton Friedmanesque economic philosophy that in ways might be described as Straussian in nature.
See also: “Leo Strauss’ Philosophy of Deception” by Jim Lobe at Alternet
http://alternet.org/story/15935/
Google also: “The Power of Nightmares,” a three hour BBC documentary that includes a provocative look at Leo Strauss and his influence of the current age of conservative politicians and writers.
http://www.google.com/search?q=“Power+of+Nightmares”
January 29th, 2009 at 2:28 pm
Newsreference,
Have you actually read Strauss, or have you just read discussions of supposedly “Straussian” neonconservatism? There’s really nothing in Persecution and the Art of Writing that lends itself to what you’re saying. Strauss maintained that all philosophers throughout history had hidden an esoteric message because (1) they feared persecution and (2) they believed an open espousal of nihilistic atheism (which Strauss considered philosophically true) would undermine the moral foundations of social life. So, for example, Strauss thinks al-Farabi and Maimonides were actually atheists. These views are not taken seriously among mainstream philosophers, which is why I called him a marginal figure.
Strauss’s points about esoteric writing, i.e. lying, weren’t directed at political rulers. Indeed, Strauss considers the Enlightenment as an attempt by philosophy to seize political power so that wouldn’t have dissemble anymore. He considers that mistaken because although seizing power would eliminate the first reason for lying, it wouldn’t eliminate the second. Again, this is total crap.
The notion that wise rulers should lie to the ignorant public comes from Plato, not Strauss. Your points about deception should really be addressed to him. But then again, talk of “Platonic neoconservatives” doesn’t sound as scary and doesn’t tap into this cultural meme.
More importantly, I don’t think people who want to lie in order to gain power feel are motivated by abstruse political philosophy: I think they just want power. I don’t doubt some have pointed to Strauss a kind of post hoc rationalization, but there’s no need for the rest of us to take this seriously. Instead of calling it a “Straussian gambit,” I’d prefer just “self-serving bullshit.” There’s no need to apply pseudo-intellectual veneer.
I think Strauss’s influence on neoconservatism is vastly overstated. I actually believe a much scarier proposition: neoconservatives actually believe in what say. (Especially with respect to religion.)
January 29th, 2009 at 7:53 pm
I think that some of the fog (of the accounting identities vs. behavioral equations etc. debate) can be dispelled by studying the main ideas of Stock-Flow Consistent Models, as developed by Wynne Godley, Marc Lavoie and their colleagues and collaborators. (For starters, check Lavoie´s website, it provides many user-friendly presentations for visitors keen to learn the basics.)
To be sure, neither the Chicago economists nor many mainstream Keynesians would be too happy to give the last word to SFC modelers as SFC modelers tend to be Post-Keynesians and have little use for “rational expectations”, “representative agents”, “optimizing agents” etc. Alas, for me that is just as it should be: the emergence of SFC models could be just the “Minsky moment” modern economics so richly deserves.
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