John Taylor may I introduce you to J.-B. Say

John Taylor, inventor of the Taylor Rule and about as sound an economist as you will find anywhere today, has given an interview to Barron’s. And in that interview he points out the obvious, that the stimulus left things worse than they were before. The interesting part is that he doesn’t really understand why and the reason for that is that he does not think in terms of Say’s Law. Here is the relevant part of the interview:

Barron’s: What’s the best case you can make on behalf of those who defend the recent fiscal stimulus?

Taylor: The case that has been made for the discretionary fiscal stimulus is based on quite conventional Keynesian theory. It is basically that, if the government gives people a lot of extra money on a one-time basis, they will spend it. Not all of it, but most of it. Similarly, when the federal government gives money to states and localities as part of the temporary fiscal stimulus, it will be spent in such a way as to boost gross domestic product. And that will greatly help when economic activity is otherwise either contracting or stagnant.

My own view is that the theory is flawed, and the evidence that the fiscal stimulus achieved the desired result is practically nonexistent. The surge in federal spending only increased the burden of the already burdensome federal debt.

Barron’s: Start with the evidence.

Taylor: The attempt to stimulate consumer spending in 2009, or the earlier attempt under President Bush in ‘08, showed the expected rise in consumer income as government payments were made, but little or no response from consumer spending. Inconveniently for the advocates, consumer spending actually declined in some of the calendar quarters when it was supposed to have been stimulated. If you use statistical analysis to take into account the factors that would have brought increases or decreases in consumer spending, you find virtually no boost to spending from the stimulus.

As for the money sent to states and localities, economist John Cogan and I found that the funds were either put into financial assets or used to reduce borrowing. The hoped-for increase in infrastructure spending was negligible.

What is also inconvenient for the advocates: According to the national income and product accounts, state-and-local government purchases were lower every quarter in 2009 and 2010 than in 2008.

Barron’s: And you would expect these results from the standpoint of economic theory?

And it is precisely here that Taylor wanders off into simply making it up. Real incomes are falling. Employment numbers are down. The number of people on Food Stamps is at an all time high. But the only thing Taylor has to explain this refusal to spend their extra money is because they will instead choose to pay down debt. The interview continues:

Taylor: Let’s start with consumer spending. It’s basic economic theory that most people look beyond the very short-term. To expect them to rush out and consume more when the government cuts them an extra check on a temporary basis is not realistic. Instead, they will bank most of the extra money or use most of it to pay down debt. There are exceptions, of course. Some people will feel so pinched, they will need to spend the money. But the data show that the exceptions don’t dominate the story.

What he needs, as does everyone, is an understanding of where demand at the aggregate level comes from. And where it comes from, as my classical economists used to say, was from the creation of value adding supply. If there is no increase in real (ie saleable) output, there will be, can be, no increase in aggregate demand.

The national accounts show increases in GDP because all expenditures by governments go straight in as production, just as if real value added had been created. But expenditure can only be of what has been bought. The difference between measured production and measured demand is called “saving” in the national accounts, but it is calculated as a residual from the other data. No actual independent calculation is made. So it appears that there has been an increase in saving when all there has been is a major reduction in productive output available for others to buy.

Taylor remains wedded to the belief that aggregate demand is an actual independent element of the macroeconomy. It isn’t and so long as he thinks in those terms, he will not, in my view, be able to finally understand why a fiscal stimulus cannot work even though he perfectly well understands that it does not.

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16 Responses to John Taylor may I introduce you to J.-B. Say

  1. Milton Von Smith

    “And it is precisely here that Taylor wanders off into simply making it up.”

    Wrong. If he’s making it up, then Milton Friedman also made up the permanent income hypothesis.

  2. Samson Agonistes

    Obama did not put any real money into states and localities and thats why there’s been a massive contraction of acivity at those levels resulting in much higher levels of unemployment in the public sector than in the private.

  3. Samson Agonistes

    I don’t really unerstand how that principle is valid, if at all, outside of a closed national economy. And this is not what currently exists, although it would have been almost true of Say’s time:

    If there is no increase in real (ie saleable) output, there will be, can be, no increase in aggregate demand.

  4. I think you’re being a little unfair on Taylor. It seems to me that he was just trying to explain Ricardian Equivalence in simple terms to a journalist.

    Though I agree that RE is an insufficient explanation of fiscal failures, since it is very rarely (if ever) 100% which leaves room for fiscal effects. A more complete (and my preferred) approach is to point out that in an open economy with floating exchange rates, all government spending funded by foreign borrowing is guaranteed 100% crowded out… and if you have an independent monetary authority that is doing their job, any remaining “benefit” you get will be offset by increased interest rates.

    The only chance of a short term sugar hit is if you have a Keynesian monetary authority that allows a net monetary expansion, and even then the “benefit” will last only for as long as monetary illusion lasts… and then you’re left with a mighty hangover.

  5. brc

    I was going to post ‘and the trolls rush in and say the reason the stimulus didn’t work was because there wasn’t enough’.

    Clearly stimulus spending must reach a ‘tipping point’ where it snowballs and has, er, positive feedback and an economy really cooks along.

    The fact that you can’t get richer until you do more or make more stuff is totally lost on those that suckle on the government teat for their lives.

  6. Samson Agonistes

    Make more stuff – in america and australia making stuff has been offshored.

  7. create value if you want to be able to spend

  8. Alan Moran

    While Taylor, like Alesina, would agree with the interpretation of Say’s Law that we cannot consume unless we produce, they also regard economies as going into periodic logjams which might be eased if the fiscal or monetary policy is appropriate and can certainly, as in 1930, be exacerbated by poor policies.

    Even Russ Roberts tips a hat at the fiscal stimulus of WWII as an economic saviour when he writes in the now famous rap dual

    ‘We could have done better, had we only spent more
    Too bad that only happens when there’s a World War
    You can carp all you want about stats and regression
    Do you deny World War II cut short the Depression?’
    ‘Wow. One data point and you’re jumping for joy
    the Last time I checked, wars only destroy
    There was no multiplier, consumption just shrank
    As we used scarce resources for every new tank’

    Industrial production increased several fold from 1938 to 1945 with little increase in measured private investment and the guns were turned into butter come the post 1945 prosperity (actually many of the guns – trucks, aircraft,liberty ships etc – were actually butter factories). Stimulus caused people to become employed and production increased (Yes I know Higgs has a different view but it is not convincing).

    The problem is that almost invariably (and certainly in the GFC)such meddling has negative effects. If only economies were as flexiible as the US in 1921, places like Greece might be able to avoid the net loss of national income of 10% and more that is inevitable.

  9. wreckage

    Industrial production increased several fold from 1938 to 1945 with little increase in measured private investment

    There was a massive increase in workforce participation.

  10. Abu Chowdah

    Make more stuff – in america and australia making stuff has been offshored.

    Good Lord. We agree.

  11. wreckage

    Nah Abu, you don’t. You see, in your language “offshored” means “driven overseas by over-regulation” whereas in his language it means “OMG OMG PROFIT HUNGRY FREE MARKET HORRORS EAT BABIES WON’T SOMEBODY THINK OF THE BABIES”.

  12. Alan Moran


    The increase in workforce participation is the whole point of the Keynesian solution which seemed to work in the 1940s but not on other ocassions. Fiscal stimulus ignited demand for military material and then supply, (and war bonds soaked up savings to prenent undue infation), got people back to work and eventually led to all those accelerators and new investment that became self-perpetuating.

    It is a great tale and a trick that has not been repeated because the conditions requiring it have not been seen since.

  13. Samson Agonistes

    Offshored means offfshored. Things get offshored due to global labour arbitrage.

    If Ford were alive today he wouldn’t raise his workers wages so they could buy his cars.

    He’d export production overseas and his unemployed workers couldn’t buy his products, but they’d find markets overseas.

    He and his rich cohort of managers would buy luxury overseas goods with the profits.

    This is a basic description of the destitute nature of the American economy, as it’s experienced by the overwhelming majority of its citizens.

  14. wreckage

    Things get offshored due to global labour arbitrage.

    No, they don’t. Or, to be more precise, a few things do, but most don’t.

    If Ford were alive today he wouldn’t raise his workers wages so they could buy his cars.

    And yet wages rise in the Western world. how?

    He and his rich cohort of managers would buy luxury overseas goods with the profits.

    If he’s offshored all manufacturing as an inevitable result of “labour arbitrage” who exactly the hell is buying his cars?

    Oh, the overseas workers! but they don’t get paid much so they can’t afford cars. And if they get paid enough to afford cars then labour costs equalise. In short the idea that companies can offshore everything and make magical profits is absurd.

  15. wreckage

    Alan, the other increase in workforce participation was the huge re-integration of women into the manufacturing workforce.

  16. Abu Chowdah

    Wreckage,you may be right. For a minute there I imagined he might grasp Say’s law.


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