Data Dispel Keynesian Economics - Again by Casey B. Mulligan September 2020 At best, redistribution from workers to the unemployed reallocates demand rather than increasing its total. July was the final month of the historically disproportionate unemployment bonus of $600 per week. The termination or reduction of benefits will undoubtably make a difference in the lives of the people who were receiving them, but old-style Keynesians insist that the rest of us will be harmed too. They’re wrong. Referring to the bonus sunset, Paul Krugman explained in August that “I’ve been doing the math, and it’s terrifying. . . . Their spending will fall by a lot . . . [and there is] a substantial ‘multiplier’ effect, as spending cuts lead to falling incomes, leading to further spending cuts.” GDP could fall 4 to 5 percent, and perhaps as much as ten percent, which is almost $200 billion less national spending a month. Wednesday the Census Bureau’s advance retail-sales report provided our first extensive look at consumer spending in August, which is the first month with reduced benefits (reduced roughly $50 billion for the month). Did consumer spending drop by tens of billions, starting our economy on the promised path toward recession? The red series in the chart below shows actual retail sales for each month of 2020. The virus itself caused off-the-chart drops this spring, followed by an on-the chart recovery soon thereafter. But in August, retail sales increased $3 billion above July, which is quite a normal monthly change. The blue series shows a forecast based on an old-style Keynesian model (I use the Brookings Institution, which provides more detail on its math than Krugman does; the Congressional Budget Office also asserts that cutting benefits would reduce national spending “in the short run.”) In sharp contradiction to reality, the model predicts a $16 billion drop, as the unemployed reduce their spending on retail and other necessities. Two critical elements are missing from the old-style Keynesian approach. The first piece is that employment, which depends on benefits and opportunity costs to employer and employee, is a bigger driver of spending than government benefits are. For every person kept out of work by benefits, that is less aggregate spending that is not made up elsewhere in the economy. The second missing piece is that taxpayers and lenders to our government finance these benefits and therefore have less to spend and save on other things. Even a foreign lender who decides to lend that extra $1 million to our government may well be lending less to U.S. households and companies. At best, redistribution from workers to the unemployed reallocates demand rather than increasing its total. Retail-Sales Data Dispel Keynesian Economics - Again | National Review I wonder if Reiver will have any comments on this?
Dunno about Reiver, but I'll dispense with Mulligan's first sentence, and let the rest collapse by itself. "At best, redistribution from workers to the unemployed reallocates demand rather than increasing its total" In Keynes' theory, recessionary conditions - with low effective demand owing to high unemployment - can be ameliorated by redistributing money from workers who still have jobs (in the private sector) via govt. taxation or borrowing, to the unemployed, to increase real demand and thus increase demand for labour, and growing the economy out of recession. So the words " reallocates demand rather than increasing its total" is a misreading of Keynes. In any case our post gold-standard era of fiat money has rendered much of Keynes' thinking on fiscal policy incomplete, as a basis for understanding modern economic conditions based on fiat currencies. Note: near the end of his life, Keynes (died 1946) was introduced to Lerner's 'functional finance', a forerunner of MMT. Keynes, in a letter to fellow economist James Meade written in April 1943, said of Lerner, “His argument is impeccable. But heaven help anyone who tries to put it across”. Well, Stephanie Kelton's book "The Debt and Deficit Myth" has recently been released, and so an understanding of the fiscal capacity of sovereign currency issuing governments should no longer need help from heaven...
It seems you either haven't read or haven't understood any of the threads on MMT. The stimulus money doesn't come from taxpayers or lenders. It is created by the Treasury or the Fed, neither of which would, indisputably, be spending it on anything else.
Keynesian economics is a very general economic model and doesn't make specific economic predictions. It is just a fact that when people lose money during a crisis this hurts jobs, this is common sense. But its hard to model the precise impact of this in a complex economy. If a lot of other things go right then instead of the economy collapsing, it just doesn't rise as much as it could. Or maybe people behave differently than expected and the loss from the benefits cut is smaller than expected. In fact while you attack Keynesian economics Trump is using this economics to prop up the economy be stimulating the economy with trillions of dollars. That is right out of the Keynesian playbook.
We do have a separate thread to debate what you are talking about: Can government print more money without causing inflation?
