The Other McCain

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Matthew Yglesias Attempts — And Rather Sadly Fails — to Understand Economics

Posted on | May 31, 2010 | 12 Comments

It’s kind of touching, really. Like watching an infant attempting to walk and falling down:

We right now have the capacity to produce more—much more—than has ever been produced before in the history of the planet. There are dozens of supply-side policies that could be improved in every country on earth, but that’s not a new fact about the world. What’s new is the lack of demand, the willingness of the key leaders in Tokyo, Frankfurt, Washington, Berlin, and now it seems London as well to tolerate stagnation and disinflation in the face of some of the most exciting fundamental new opportunities for human economic betterment ever.

A mild rebuke from Tyler Cowan:

Reading the Keynesian bloggers, one gets the feeling that it is only an inexplicable weakness, cowardice, stupidity, whatever, that stops policies to drive a more robust recovery. The Keynesians have no good theory of why their advice isn’t being followed, except perhaps that the Democrats are struck with some kind of “Republican stupidity” virus.

What Yglesias can’t seem to get through his head is that we are suffering from a capital shortage. There is no magic formula to restore the asset-value lost in the housing-bubble meltdown. Nor can any monetary or fiscal intervention magically restore the asset-value lost in the stock market slide. 

The Dow Jones Industrial Average, still nearly 4,000 points (28%) below its October 2007 peak, has spent the past month trying without success to regain a plateau near 12,000. That 28% decline is real and, combined with the decline of home values, has had a severe impact on the net worth of many Baby Boomers nearing retirement.

Investors are resisting the conclusion that we may be entering the second phase of a double-dip recession, but the conclusion may soon prove irresistible. Most people didn’t notice this Friday, but the FDIC shut down five more banks Friday, bringing the 2010 bank failure total to 78. Five months into the year, we are on pace to substantially eclipse the 140 bank failures of 2009. The FDIC’s list of “troubled” banks is now at 775 — nearly 10% of all U.S. banks.

The official unemployment rate is still 9.9% and shows no prospect of significant decline before next year. The European debt crisis still isn’t over and the newest worry for investors is municipal default — Harrisburg, Pa., Detroit and Jefferson County (Birmingham), Ala., being the leading edge of that problem.

Yglesias wants government to stimulate demand, and he wants it stimulated now, and the warning signs be damned. Most Americans have reduced their debt, paying down their credit cards, but Yglesias thinks the government should increase its debt by engaging in yet more deficit spending.

When the only tool you’ve got is a hammer, every problem looks like a nail. And when the only economics you’ve got is Keynes, every problem looks like a shortage of aggregate demand.

UPDATE: Shockingly, Kevin Drum at Mother Jones (!) feels that cutting taxes might be an effective stimulus. But the type of cut he suggests — a payroll tax holiday — would be Keynesian in its purpose, aiming to stimulate consumer demand.

Demand is not the problem, and it was not by stimulating demand that the “supply-side revolution” of the 1980s succeeded. What the reduction of top marginal rates (and deregulation) accomplished was to encourage capital formation, and to make the U.S. a more attractive place for capital investment. It was the liberation of capital that created the long boom.

Extending the Bush tax cuts and eliminating the estate tax and the capital-gains surtax — that would be supply-side.

Nevertheless, it’s encouraging to see a liberal argue that tax cuts are a good thing. There may yet be hope.

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Comments

  • http://ibleedcrimsonred.com GulfCoastBamaFan

    What the left-leaning Keynesians can’t bring themselves to admit is that a tax cut has exactly the same effect on demand as an increase in government spending. This is the whole “supply side” argument made during the late 1970’s and early 1980’s. “Supply side” economics argues that tax cuts are actually more efficient in stimulating demand, because the tax cuts put the money in the hands of the people best suited to make decisions regarding the allocation of the resources.

    Also, tax cuts are the stimulus that keep on giving. An $860 billion stimulus package has a finite lifespan because once the government shoots its wad, it’s done. But the same $860 billion placed in consumer and business-owner hands gives, and gives, and gives for years to come. Government can’t create wealth with stimulus packages because government can’t create capital. Only the private sector can do that. Increases in government spending are a short run solution to a long run problem. Tax cuts are the right solutions, because they always have long run impacts. Always. Always. Always.

    I learned Keynesian economics from a monetarist.

  • http://ibleedcrimsonred.com GulfCoastBamaFan

    What the left-leaning Keynesians can’t bring themselves to admit is that a tax cut has exactly the same effect on demand as an increase in government spending. This is the whole “supply side” argument made during the late 1970’s and early 1980’s. “Supply side” economics argues that tax cuts are actually more efficient in stimulating demand, because the tax cuts put the money in the hands of the people best suited to make decisions regarding the allocation of the resources.

    Also, tax cuts are the stimulus that keep on giving. An $860 billion stimulus package has a finite lifespan because once the government shoots its wad, it’s done. But the same $860 billion placed in consumer and business-owner hands gives, and gives, and gives for years to come. Government can’t create wealth with stimulus packages because government can’t create capital. Only the private sector can do that. Increases in government spending are a short run solution to a long run problem. Tax cuts are the right solutions, because they always have long run impacts. Always. Always. Always.

    I learned Keynesian economics from a monetarist.

  • Mack A. Velli

    The left aren’t Keynesians because they believe in Keynesian economics, nor because they care what happens to the economy, so refuting it doesn’t make a darn bit of difference to them. They are Keynesians because it gives them an excuse to execute their social and political goals, a means to an end, that end being the removal of power from the hands of the people and the transfer of that power to the Government. It’s not that they can’t bring themselves to admit the truth about tax cuts vs. spending – they don’t care – it’s irrelevant to their purpose.

  • Mack A. Velli

    The left aren’t Keynesians because they believe in Keynesian economics, nor because they care what happens to the economy, so refuting it doesn’t make a darn bit of difference to them. They are Keynesians because it gives them an excuse to execute their social and political goals, a means to an end, that end being the removal of power from the hands of the people and the transfer of that power to the Government. It’s not that they can’t bring themselves to admit the truth about tax cuts vs. spending – they don’t care – it’s irrelevant to their purpose.

  • http://www.rightklik.net RightKlik

    I can’t read Yglesias anymore. The ignorance is overwhelming.

  • http://www.rightklik.net RightKlik

    I can’t read Yglesias anymore. The ignorance is overwhelming.

  • Estragon

    I read Yglesias a few times after he was first touted by the Short Pants Brigade at NRO, saw nothing of value and never repeated the mistake.

    The “supply side” argument wasn’t that tax cuts are the stimulative equivalent of government spending, it was that leaving the money in the hands of the private sector was so much more efficient than leaving spending decisions to bureaucrats that the increased economic activity would replenish all the revenue lost.

    Leftists show a positively religious fervor for policies which have been repeatedly tried around the world and over time, but have failed every single time to achieve their objectives. You have to give them points for blind faith. Odd, since most of them are atheists anyway . . .

  • Estragon

    I read Yglesias a few times after he was first touted by the Short Pants Brigade at NRO, saw nothing of value and never repeated the mistake.

    The “supply side” argument wasn’t that tax cuts are the stimulative equivalent of government spending, it was that leaving the money in the hands of the private sector was so much more efficient than leaving spending decisions to bureaucrats that the increased economic activity would replenish all the revenue lost.

    Leftists show a positively religious fervor for policies which have been repeatedly tried around the world and over time, but have failed every single time to achieve their objectives. You have to give them points for blind faith. Odd, since most of them are atheists anyway . . .

  • http://www.coldfury.com Randy Rager

    I go and mock Yglesias on a regular basis, usually for equivocation.

  • http://www.coldfury.com Randy Rager

    I go and mock Yglesias on a regular basis, usually for equivocation.

  • Schecki the Wonder Pup

    Estragon, I find that not odd in the least. Atheists exhibit the most blind faith in their religion of any religion on earth. For any other religion, it is logically conceivable that religion could, at some point, be proven by the appearance of whatever deity(s) or entities it is based on. Atheism, on the other hand, can logically never be proven, therefore it requires far more faith than any other religion. Particularly impressive is the faith of the Atheist Fundementalists, who insist on proseletyzing their faith despite the absence of any reward for doing so, even to the point of persecuting heretics against the Atheist faith.

  • Schecki the Wonder Pup

    Estragon, I find that not odd in the least. Atheists exhibit the most blind faith in their religion of any religion on earth. For any other religion, it is logically conceivable that religion could, at some point, be proven by the appearance of whatever deity(s) or entities it is based on. Atheism, on the other hand, can logically never be proven, therefore it requires far more faith than any other religion. Particularly impressive is the faith of the Atheist Fundementalists, who insist on proseletyzing their faith despite the absence of any reward for doing so, even to the point of persecuting heretics against the Atheist faith.