Lazy Keynesian thinking is found everywhere, even in places I least expect it. This is from Alan Mitchell’s column in today’s AFR.
The economic impact of the Gillard Government’s savings will depend on where they fall. If, as seems likely, it targets the tax breaks of higher-income earners, the impact will tend to fall on savings rather than consumption, and the effect on growth should be relatively short term.
So here is what understanding pre-Keynesian economics brings to you. If some economic change falls on savings it falls on investment and therefore will damage the economy. If it had actually fallen on consumption instead then the effect on the economy would have been almost negligible. Keynesian theory blots out most of an economist’s ability to understand the nature of the business cycle which is why hardly anyone saw the current slowdown coming.
Of course, to describe anything the Gillard Government does as a form of saving may be the most ludicrous part of all.
http://blogs.news.com.au/heraldsun/andrewbolt/index.php/heraldsun/comments/swan_saves_by_taxing_you_more/
Ivan Denisovich
25 Sep 12 at 5:06 pm
That is just plain wrong.
.
25 Sep 12 at 5:11 pm
to ascribe any economic knowledge to Swan/Rudd/Gillard is even more laughable.
NoFixedAddress
25 Sep 12 at 6:12 pm
This example shows why the Keynesian inclusion of the X-M term inadequately models the impact of international transactions when apply Keynesian analysis to national accounts.
Yes, the raise in tax rates reduces savings, exacerbated by capital flight and this is picked up by X-M. But this capital flight forces down the currency, and real incomes fall (because M is more expensive). This fall in real income is not recognised as a leakage in the Keynesian model.
2dogs
25 Sep 12 at 6:37 pm
“Yes, the raise in tax rates reduces savings.”
2d, sympathies overall, but this statement is why I dropped out of Eco 101.
To my way of thinking, a raise in taxes could just as well increase savings.
Exhibit A: me. I’m given notice of a raise in taxes. I envisage that those tax increases will not come back to me in any discernable form. I might very well conclude that my only option is to make cuts in my current outlays, and put money aside – savings-, in the expectation that these taxes will persist. Moreover, if I form the view that this is the beginning of a trend (a la Swan/Gillard)I may well resolve to make even deeper cuts in my current expenditure.
In the end, I might even put aside more than I did previous to the announcement of tax hikes.
Now, obviously there’s a limit. If a government taxed me 100% of my earnings, I could save nothing. But of course cet. par. I would be dead within a few short weeks.
But in general, I reject the Keynesian notion that increased taxes automatically means less saving. It may, or it may not, depending on how the increased tax is perceived by the individual taxpayer.
Hugh
25 Sep 12 at 10:57 pm
Higher taxes = lower disposable income. As savings are a function of income, of course higher taxes means less savings.
sdfc
25 Sep 12 at 11:19 pm
Correct, Barro refers to this, it is a form of Ricardian equivalence. sdfc is living in a static world without time.
.
26 Sep 12 at 11:27 am
Ricardian equivalence, the get out clause for those with nothing much to contribute outside of the bunkum that is rational expectations.
sdfc
26 Sep 12 at 3:33 pm
Capital flight is saving by investors but it doesn’t fit into a national income accounting framework.
I’d be careful about whom I call lazy.
.
26 Sep 12 at 3:35 pm
You’re making even less sense than usual.
sdfc
26 Sep 12 at 5:35 pm
Your insults are devoid of any substance. Just face up to the fact you hitched your wagon to a load of snake oil.
FFS you’re even denying that capital flight occurs.
Kydland, Prescott and Lucas all quantified their work and won nobel prizes – 70% of the business cycle has nothing to do with anything related to Keynes and the Keynesian policy simply don’t work.
You’re an old hack. Shut up.
.
26 Sep 12 at 6:03 pm
Dot, for Keynesians, capital flight increases X-M, and is therefore considered a stimulus.
When the rats start deserting the sinking ship, the Keynsians think its going full steam ahead.
2dogs
26 Sep 12 at 6:55 pm
I’m denying there has been a capital flight from the US and Australia and informing you the national accounts deal with international capital movements.
Therefore your comment about capital flight and the national accounts make no sense. Got it?
It’s funny you cite people like Prescott, who likes to ignore the 45% drop in nominal income between 1929 and 1933 when analysing the depression and Lucas who thinks it was one gigantic worker holiday.
sdfc
26 Sep 12 at 6:58 pm
sdfc, no capital flight from Australia, but for the US, oh, my goodness, yes:
Year Gross domestic investment
2004 95.668
2005 100
2006 102.823
2007 100.28
2008 92.566
2009 74.164
2010 81.704
2011 83.642
US is still well below pre-GFC levels of investment.
2dogs
26 Sep 12 at 7:11 pm
2Dogs
That’s not capital flight which suggests foreigners are pulling their money out of the US but rather the after effect of the financial crisis.
sdfc
26 Sep 12 at 7:16 pm
Oops, wrong column pasted there:
Gross domestic investment
2004 2340.9
2005 2564.3
2006 2752.2
2007 2751.7
2008 2584.8
2009 2056.2
2010 2242.9
2011 2335.1
2dogs
26 Sep 12 at 7:21 pm
2Dogs
You’ll notice the increase in investment coincided with the the pre-crisis credit boom.
sdfc
26 Sep 12 at 7:26 pm
It’s both: the GFC scared a lot of people from investing in the US.
In any case, US share of investment globally has declined post GFC, along with the rest of the developed world. The developing world, particularly Africa, has been the beneficiary.
2dogs
26 Sep 12 at 7:27 pm
Nice graph of the developing/developed world share of investment here:
http://blogs.worldbank.org/prospects/the-emerging-pattern-of-global-investment
2dogs
26 Sep 12 at 7:36 pm
That’s because national income accounting is nonsense.
Yeah I’m sure that’s exactly why 70% of the business cycle can be explained away by factors of production, and they won nobels. Rational expectations is so wrong – you have to lie about Lucas.
You really are a crusty, bitter old hack.
.
26 Sep 12 at 7:38 pm
2Dogs
Crises scared a lot of people from investing fullstop as expectations of future profits decline and uncertainty (and risk premiums) rise pretty much as Keynes said in the GT.
Dot
You are terminal dolt. National income accounting is a tautology you silly person.
Explaining business cycles by using general equilibrium models is a useless task if the cycle is the result of financial processes.
No-one has lied about Lucas.
sdfc
26 Sep 12 at 7:55 pm
“Crises scared a lot of people from investing fullstop”
Absolutely wrong. Check out the World Bank graph I linked to above. Global investment remains just over 20% of world GDP, both before and after the GFC.
What has changed is the developing/developed world share.
2dogs
26 Sep 12 at 8:03 pm
Keynes never said that. He wrote a silly model with no foundations and no empirical proof, with no connection to whatever the hell he said about expectations, which were completely asinine anyway. What can we expect from a philiosophy grad with one semester of econ 101 and one semester of political economy anyway as his sum total knowledge of economic science?
Actually, it is also erroneous, 2dogs was correct. Do you really think capital flight increases average incomes, even in the short term?
What kind of bone headed misanthrope can possibly think this is correct?
Please show me a quote saying that Lucas said “it was one gigantic worker holiday”. You lying idiot.
The Keynesian/national income accounting model doesn’t encapsulate financial markets at all. There is no genuine consideration of international capital movements. Did it ever dawn on you that any mathematised model of the economy, particularly a GE model, can have a financial sector as part of the model?
Yet you have the temerity to call me a dolt. You innumerate, self aggrandising wanker.
.
26 Sep 12 at 8:12 pm
Keynes never said that.
That you continually comment on a book you have obviously never read is a constant source of amusement.
Only you could call a tautology erroneous. Keynes didn’t “invent” national accounting, it is not a “model” in the GT.
The GT is largely about investment decisions under uncertainty where money, financial and real assets are alternatives. Your crap about capital flight is just irrelevant. Keynes has been proven correct about the behavior of financial markets. Of course you would know this if you had actually read the book.
A GE model incorporating the institutional structure of the financial market and investment decision making under uncertainty I’d like to see that.
2Dogs
We know the change in the global economy that has been going in the past decade. But as your time series shows, US investment rose through to 2006 and then fell as the financial sector came under stress. You’ll notice US investment began to grow again in 2010.
sdfc
26 Sep 12 at 9:19 pm
Yea? Okay, well you’re boastfully implying you read the book and therefore it seems both you and fat lips was/is wrong.
Zero interest rates is not the dead end fat lips suggested in his stupid book as Milt and now market monetarists have shown.
JC
26 Sep 12 at 9:23 pm
Yes I have. It is a terrible book. Not only was Keynes a bad writer, he was a very bad amateur economist.
No dummy. It is a tautology. It is also deeply flawed.
Do you think capital flight increases average incomes, even in the short term?
You can’t answer this question because it would pop the blister in your mind which is Keynesian “economics”.
No it doesn’t.
Keynes also said that gold has no intrinsic value and we’d solve a recession if the central bank buried banknotes in the middle of nowhere and we wasted resources to dig them up.
He was such an idiot he contradicted himself from his smugness to his lunacy. Now if it was in jest then he is admitting his presumptions were wrong.
No. You are changing the goalposts. Keynes doesn’t do that either. There is no way in hell Keynes can do that.
You cannot answer questions and lie. You inadequate, moronic, poorly educated little man.
.
26 Sep 12 at 9:26 pm
SDFC
Dot’s last sentence is a goal, I think.
JC
26 Sep 12 at 9:28 pm
Was there anything Keynes was right about, JC?
Giving out investment advice based on Keynes. LOL.
It would be the same, based on their level of education, as going to Ben Eltham or Jonathan Green to ask about investing in perpetual notes.
No response. Keynesians are brainwashed fuckwits.
.
26 Sep 12 at 9:29 pm
Those two numbskulls…. imagine those two idiots with an investment fund.
JC
26 Sep 12 at 9:31 pm
Keynes never said a zero interest rate was the end of policy options. Buying bonds was one of Keynes remedies only he suggested targeting the yield curve rather than reserves.
Adding more reserves is a waist of time. There are already more than ample excess reserves in the system. Conventional fixed mortgage rates are already at all time lows. So what do we get? A boost to equities, commodities and a lower dollar.
sdfc
26 Sep 12 at 9:32 pm
No response to your comment about capital flight? You’re just babbling now. Once again what capital flight?
sdfc
26 Sep 12 at 9:33 pm
You are pathetic.
.
26 Sep 12 at 9:36 pm
Answer the question big mouth.
sdfc
26 Sep 12 at 9:38 pm
What’s wrong with the stock market being a predictor of higher economic activity through higher stock prices, SDFC, you mentally retarded clam.
The Dollar is actually higher since the first QE, you dolt.
JC
26 Sep 12 at 9:39 pm
I answered plenty of questions, and tackled your absurd assertions and lies sfdc.
Tell us how capital outflows increase income, fuckwit.
You really ought to be stripped of any academic degrees you have, even if they are a BA in Macramé or a Cert III in Financial Services.
.
26 Sep 12 at 9:42 pm
Only if prices are a reasonably accurate reflection of future earnings.
As for the dollar being higher, I think a little thing called the euro has something to do with that.
sdfc
26 Sep 12 at 9:42 pm
No one has said capital outflows increase income.
That’s the funny thing, yet you continue to have this argument about a phantom capital flight.
sdfc
26 Sep 12 at 9:45 pm
“Once again what capital flight?”
sdfc, are you blind? Its pretty plain on the World Bank graph.
2dogs
26 Sep 12 at 9:45 pm
Stop lying.
.
26 Sep 12 at 9:49 pm
Yep, it happened to portfolio and direct investment.
“What capital flight”
LOL
Imbecile.
.
26 Sep 12 at 9:50 pm
No its not two dogs its money finding its way to the highest return markets. It was happening prior to the GFC and will continue to happen, outside of complete disaster. The US is not experiencing capital flight.
You post up numbers and then apparently discard them when they no longer suit your argument.
sdfc
26 Sep 12 at 9:52 pm
That’s what I thought you meant.
However, is St John of Patmos considered a prophet?
.
26 Sep 12 at 10:03 pm
Keynes also said that gold has no intrinsic value and we’d solve a recession if the central bank buried banknotes in the middle of nowhere and we wasted resources to dig them up.
Keynes was making the comment that gold discoveries increase the money supply and promote economic growth. He was in effect musing about creating an artificial gold rush. It is a brilliant piece of economic theorising.
I’ve given you a task to find a GE model with the detail of Keynes now go to it.
All my comments here find the argument by me about capital outflows.
sdfc
26 Sep 12 at 10:04 pm
Sorry, wrong thread.
.
26 Sep 12 at 10:04 pm
sdfc, “money finding its way to the highest return markets” is a fairly situation with capital flight.
Twice on this thread you have taken a situation where A is a common cause of B, and stated that because it is A it can not be B.
Again, its both. Go away and read the definition of “modus ponens”.
2dogs
26 Sep 12 at 10:05 pm
So in fact, he was wrong that gold has no intrinsic value.
“Brilliant”
No. I said you can model financial markets – which Keynes didn’t actually do. Given Keynes has been empirically proven wrong so many times – why would I want to model his non assumptions and self contradicting hogwash?
Yeah right sfdc. I’m only going to “win” by finding assumptions which are bullshit and I don’t agree with in work that empirically destroys Keynes.
You monumental, colossal fuckbrained idiot.
.
26 Sep 12 at 10:08 pm
“No one has said capital outflows increase income.”
Keynesian models say exactly that. Outflows on capital account mean inflows on current account, therefore stimulus.
Yay! Rats leaving our sinking ship!
2dogs
26 Sep 12 at 10:11 pm
2dogs
If you agree that US investment fell as a result of the financial crisis then I am not sure what you are arguing. Are you arguing with yourself like Dot.
The US is not experiencing capital flight. Maybe it’s you who need to discover what capital flight is. The US has net financial inflows.
What Keynesian model are you talking about? The argument usually mounted against Keynes is the exact opposite.
sdfc
26 Sep 12 at 10:25 pm
“I am not sure what you are arguing”
The GFC, and the conditions which caused it, are some of a number of factors that have appeared in the developed world over the past decade which have made it relatively unattractive to invest in the developed world.
I am arguing that this has caused a capital flight from the developed world (including the US) to the developing world.
As can be seen from the World Bank graph, the size of this capital flight, as measured by investment, is about 5% of world GDP.
2dogs
26 Sep 12 at 10:39 pm
“The US has net financial inflows.”
Not any more:
Foreign-owned assets in the United States, excluding financial derivatives (increase/financial inflow (+))
2011 Q1 578,972
2011 Q2 98,554
2011 Q3 266,397
2011 Q4 57,067
2012 Q1 59,564
2012 Q2 -118,727
That is a minus sign in front of that last quarter there.
2dogs
26 Sep 12 at 11:25 pm
2 Dogs
If you got that from the TICS report (yea TICS, really) pay not much attention to monthly inflows and outflows as they are notoriously volatile.
JC
26 Sep 12 at 11:39 pm
“What Keynesian model are you talking about?”
1. Y = C + I + G + (X – M)
2. Capital flight means (X-M) increases, therefore Y increases.
3. Apply multiplier effect to this nominal increase in Y. (That’ll fix unemployment. Should we worry about inflation?)
_____________________
Bottom line: An absolutely reckless disregard for prices. Falls in asset prices and the currency ignored with insane results.
2dogs
27 Sep 12 at 12:38 am
2Dogs
Now you are just being silly.
The equation Y = C + I + G +(X-M) is merely GDP(E)
GDP(E) = GDP (I) = GDP (P) is a tautology.
An increase in X-M is not capital flight, but suggests a lower propensity to borrow from the rest of the world.
The argument generally made against deficit spending is generally that X-M decreases so full marks for at least attempting something new.
Government spending ends up as deposits in private sector bank accounts. In other words public sector loan expenditure increases private sector income.
Just as private sector loan expenditure increases income.
When an economy is running at well below full employment the increase in money will manifest itself in higher employment as well as higher prices. Only in a fully employed economy will the increase in private income as a result of deficit spending be purely inflationary.
Keynes devoted considerable space to asset prices in the GT.
sdfc
27 Sep 12 at 2:23 pm
“An increase in X-M is not capital flight”
sdfc, are you actually suggesting that capital flight means a decrease in (X-M)? Or that it has no effect?
What, in your crazy understanding of capital flight, is its effect on the balance of payments?
2dogs
27 Sep 12 at 3:03 pm
No I’m suggesting there has been no capital flight in the US. The US has net financial inflows.
Capital flight is what some of the Asian tigers experienced in Asia in 1997/98 and some European countries currently.
In saying that deficit spending causes X-M to rise you have things exactly arse about.
sdfc
27 Sep 12 at 9:43 pm
I never said deficit spending causes (X-M) to rise. I said capital flight causes (X-M) to rise.
I have not been talking about the government budget position at all, so I don’t know why you started on it. Capital flight could be caused purely by hostile regulations, for example.
So, getting back to the question, do you or do you not accept that capital flight means higher (X-M)?
2dogs
27 Sep 12 at 10:00 pm
Capital flight would mean higher net exports as imports become more expensive.
However a change in the balance of trade in favour of higher X-M does not necessarily mean capital flight.
sdfc
27 Sep 12 at 10:18 pm
“Capital flight would mean higher net exports”
Yes! We are now in agreement!
Now, next step, lets see what Keynesian analysis thinks of that situation.
According to Keynes, higher net exports = higher aggregate demand. And those Keynesians sure love higher aggregate demand. They want to add a multiplier effect to that. Yay! Rats deserting the sinking ship!
2dogs
27 Sep 12 at 10:26 pm
You’ve lost the plot again. Higher aggregate demand means lower X-M.
We are back to the simplified world where higher income equals higher interest rates, capital inflows, a higher dollar and lower net exports. Like I said you have your causation exactly arse about.
sdfc
27 Sep 12 at 10:33 pm
That’s not the correct way of explaining it.
It’s not that imports would become more expensive but there would be less domestic demand.
But it would mean a tendency toward a surplus on the capital account, no?
JC
27 Sep 12 at 10:41 pm
it means a tendency towards less.
JC
27 Sep 12 at 10:43 pm
sdfc, look at the aggregate demand equation:
Y = C + I + G + (X – M)
What happens to Y, in the same period, if the term (X-M) is higher? Surely the left hand side is higher, too?
Higher Y may subsequently cause lower (X-M), but that would be due to the application of some multiplier effect.
______________
Keynesians call higher net exports (X-M) a stimulus, in the same way as they call higher government spending (G) a stimulus. An increase in any of the terms in the aggregate demand equation is a stimulus.
A multiplier is applied to them all.
With reckless disregard for prices.
2dogs
27 Sep 12 at 11:02 pm
Another way to look at it is this:
Keynes says, it would stimulate the economy if “X” would borrow money from the financial system and use the proceeds on current expenditure.
Substitute either “government” or “foreigners” for “X”.
2dogs
28 Sep 12 at 12:03 am