Friday, June 26, 2015

Scott Sumner - Keynesian Imperialist

And I'd say the same about Jose's comments on Keynesians. Lots of Keynesians do favor wealth redistribution, but there isn't any necessary linkage. As I point out in this post, it's perfectly possible to be a conservative Keynesian and favor small government. You can simply use tax cuts as your preferred form of fiscal stimulus. - Scott Sumner, I don't favor an interventionist monetary policy to fix recessions

Ouch, my brain.

This is so many types of weird.

A small government Keynesian (SGK)?  This is perfectly possible?  Like, Big Foot is perfectly possible?  What's the point in telling us that Big Foot is perfectly possible?  I'm not interested in the perfect possibility of his existence... I'm interested in evidence of his existence.  If Sumner knows of a SGK then he should tell us this person's name!  So we can take pictures.  And perform experiments.

Maybe Sumner is a SGK?  If not, then why not?  Let's pretend that he is!

Let's say that Sumner and Henderson both want tax cuts.  However, Sumner is a SGK while Henderson is not.  This is because Sumner wants tax cuts to stimulate the economy while Henderson just wants tax cuts to...uhhhh... not stimulate the economy.

Sumner:  I support tax cuts so that people will have more money to spend!!!
Henderson:  I support tax cuts so that people will have more money to save!!!

I take issue with this idea of needing, for any reason, to stimulate the economy.  If the economy has problems... if it's sluggish...  then it's because resources are inefficiently allocated.

Like, one time, my gf accidentally threw her keys away.  Hey Sumner, how do you translate her action into "econ"?  You know the answer... right?  Yeah?  The answer is... she "inefficiently allocated her keys".  Because she inefficiently allocated her keys, we wasted several hours searching for them.

When Sumner talks about "fiscal stimulus"... then I honestly have to wonder whether he truly grasps what it means for resources to be (in)efficiently allocated.

My second favorite liberal in the whole wide world kinda has this rule...

Quiggin's Implied Rule of Economics (QIRE) - Society's limited resources should be put to more, rather than less, valuable uses

Does Sumner think QIRE is a good rule?  Wouldn't you like to know?  I sure would.

Personally, I think it's an excellent rule!  Society maximizes benefit when it does the most beneficial things with its limited resources.

So where is the role for "fiscal stimulus"?  In theory, it has a role when the economy needs fixing.  But the only reason that the economy should ever need fixing is because QIRE is being violated.  The goal for every economist should be to clarify how, exactly, QIRE is being violated.

Tyler Cowen recently linked to this article in the LA Times about minimum wages...
Garcetti said county adoption of the minimum wage proposal would put the Los Angeles area “past the tipping point.” He predicted other cities would follow suit to avoid losing the most qualified workers to higher-wage areas. 
Some cities, including Santa Monica and West Hollywood, are already considering raising the minimum wage. However, larger cities in the county, including Pasadena and Long Beach, have remained on the sidelines of the debate. - Abby Sewell, Jean Merl, Sarah Parvini, Business concerns stall minimum wage vote by L.A. County board
Eric Garcetti is the mayor of Los Angeles.  Here's his logic...

Cause: LA mandates higher wages
Effect: LA increases its supply of workers

By mandating higher wages, Garcetti is effectively saying, "Hey everybody in the world!  LA has a shortage of workers!!!  So we're increasing your incentive to help us solve this huge problem!!!"

LA has a shortage of workers?  I guess.  Because, why else would Garcetti want to increase the supply of workers?  It sure wouldn't make sense to increase the supply of workers when there's a surplus of workers.  Except, if LA truly does have a shortage of workers... then why in the world would the mayor need to mandate higher wages?  Usually prices automatically increase when supply doesn't meet demand.  Evidently Garcetti is under the impression that prices are broken.  From his lofty vantage, the mayor can clearly see that LA has a shortage of workers... and the price of labor does not accurately communicate this reality.

Who should we trust?  Garcetti?  Or prices?

If we trust prices then, in reality, LA has a surplus of workers.  And raising the minimum wage will only make this problem worse.  It will result in an even more inefficient allocation of unskilled labor.  It will hurt the economy.

And how do we help the economy?  Stimulus!  In order to help the economy we first have to identify exactly how QIRE is being violated.  When my gf threw her keys away she violated QIRE.  When Garcetti throws workers away he violates QIRE.

Cause: Garbage in
Effect: Garbage out

Society's limited resources are misallocated and the inevitable problems are "solved" with... stimulus.  And what's stimulus?  The misallocation of resources.    

Keynesians really did an excellent job of capturing the narrative.  I'll give them that!  The topic of debate isn't the system... it's stimulus.  Scott Sumner is allocating his scarce resources to help promote this narrative.  The economy isn't my girlfriend and I digging threw the trash to find her keys.  It's not unskilled workers wandering around LA trying to find jobs.  Instead, the economy is some sentient being... completely independent of individuals.  When this being has a problem... then invariably the solution is stimulus.  Just like in the military how Motrin will "solve" any problem.  Sucking chest wound?  Have some Motrin.

Motrin is an easy "fix".  Just like stimulus.  Even the word "stimulus" is easier to write than "inefficient allocation of resources".  The revolution was postponed...yet again, because of semantics.  The other side has all the best word smiths!  And in our superficial system, style always wins over substance.

No comments:

Post a Comment