Fighting Keynes with Keynes
Video director and economics educator John Papola (of Keynes/Hayek rap fame) has a new article called "Consuming Our Way to Prosperity is Macro Folly" up at the PBS Newshour web site. In the article, he once again criticizes Keynesian economics. However, to support that critique, he enlists "market monetarist" Scott Sumner and monetary equilibrium theory. He writes:
"To paraphrase monetary economist Scott Sumner, there are only two ideas students of macroeconomics should be taught: Say's Law of markets and monetary equilibrium theory. The rest of Keynesianism with its focus on real spending, government deficits and encouragement of unproductive consumption can and should be discarded."Elsewhere, Papola has indicated the extent to which he has become converted to the position of the market monetarists like Sumner, who advocate targeting Nominal Gross Domestic Product (NGDP):
Given, I'm not a monetary economist so my views MUST be taken with skepticism... now... I think that NGDP-targeting makes the most sense as a central bank policy with the goal of monetary neutrality. I think this is the right goal. I think that it is consistent with Hayek's view of money and it's function as a "loose joint" in the economic system. It seems like the most effective way of equilibrating the supply of money with the demand for money. Here are my caveats with Market Monetarism. 1. Central banks injecting money in particular places will have injection effects with relative price changes that are not the product of consumer/producer decisions. This is bad for the sustainability of the structure of production that emerges. But a futures-market based system as Sumner and Lars favor seems aimed at addressing this concern. So, NGDP-targeting is a second-best in a world of central banking. 2. I don't think targeting NGDP growth should be the ideal. NGDP shouldn't grow at all. The target should be stable, zero-growth NGDP. So, if the demand for money increases, increase the supply to meet it... not to exceed it. Let productivity drive the nominal price level DOWN. Productivity-norm deflation is good. It would reduce excessive risk-taking and prevent the accumulation of loose credit conditions that manifest in malinvestment and bubbles.Papola has stressed that while he is critical of "underconsumptionist" explanations of recessions, he is not critical of all "demand-side" explanations. While defending his awesome Christmas econ video, "Deck the Halls with Macro Follies", Papola wrote:
I was very VERY explicit about what was a fallacy: that consumer spending can grow the economy. That's not calling all "demand-side stories" a fallacy by any stretch. It's calling underconsumptionism a fallacy... and it is... and there is a tragic amount of underconsumptionist-sounding rhetoric at all times being asserted by Keynesian economists and pundits. So if anyone is guilty of conflating Keynesianism with underconsumption, it's people like Paul Krugman and everyone that's ever noted how important consumer spending is for the economy "because consumer spending is 70% of GDP". But that nonsense isn't the totality of "demand-side stories". I view the "demand side" as the nominal/monetary story. As sumner explains, NGDP (or AD as he calls it often) is controlled by monetary policy. So there IS a demand-side story which I've written about repeatedly and included in my video content from the beginning: nominal spending stability via monetary policy.Of course, by "AD", Papola means Aggregate Demand. Papola believes in targeting Aggregate Demand/NGDP to keep the economy healthy. Papola has also indicated that the evolution of his macroeconomic thought has been influenced by George Selgin's theories, which, as Joseph Salerno has pointed out, also heavily stress Aggregate Demand. By attempting to hang his macroeconomic arguments on an Aggregate Demand-based conceptual framework, Papola necessarily vitiates his attempts to defend Say and overthrow Keynes. To understand why, read Professor Steven Kates's recent Mises Daily, "The Errors of Keynes's Critics", in which Kates writes:
If you want to get to the essence of Say’s Law you must never think in terms of aggregate demand and aggregate supply. Just drop it from all conceptual discussions of the economy and I think, although I can’t be sure, you will find yourself necessarily thinking about issues in the same way as the Classical economists. As I have argued in my Say’s Law and the Keynesian Revolution (Elgar 1998), if you want to defeat Keynesian economics, you need to wage war on the very notion of aggregate demand. Nothing else will do.Papola is a master communicator and an outstanding artist. But I fear he is at risk of coming down with ADD (Aggregate Demand Disorder). So far, his most outstanding creations (his videos, as opposed to his articles and blog comments) don't seem to bear any significant trace of ADD, which is why they are so powerful. But it would be a shame if his critiques of Keynesian economics were themselves to become subverted by typically Keynesian notions.