She’s long been considered a big downer of an economist, but Tucker Hart Adams is considered something of a local celebrity and her recent condemnation of deficit spending and the debt-based economy in general were front page news.
I like Adams. She’s certainly not an Austrian, but she gets it. Specifically, she understands that an economy cannot handle crushing debt forever. The negative savings rates and a disproportionate emphasis on consumer spending seem to be a problem for her – unlike many economists.
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When all these defaults hit, can we expect an interest rate increase? Something along the lines of 9%? That would be nice right about now.
She gets it? Okay. What about many economists that say almost exactly what Adams is saying? Economists things like…
Paul Krugman?
Larry Summers?
Brad Delong?
Brad Sester?
Nouriel Roubini?
Do they “get it”, too?
Does this mean Austrians actually agree with the likes of Paul Krugman?
She still seems to be a Keynesian because she emphasizes consumer spending as the driver of the economy. We should keep in mind that only the Fed can cause a recession. We may be in one now, based on the yield curve, but we’ll have to wait a few quarters for the NBER to confirm it. But we should suspect it if unemployment begins to rise, since it’s a lagging indicator.
Socks said;
“Does this mean Austrians actually agree with the likes of Paul Krugman?”
More like “Even A Stopped Clock Is Right Twice A Day”.
Roger M,
I’m not sure how emphasising “consumer spending as a driver of the economy” would make one a Keynesian.
Keynes himself thought the business cycle was driven by swings in investment spending and that consumer spending simply followed the cycle.
That seems to be Adams opinion as well. She isn’t saying that cutting back consumer spending will lower income, she’s saying that consumer spending will be cut as income falls. And she thinks that income will fall as a result of falling investment and supply shocks.
A very “Keynesian” analysis, but not for the reasons you described.
“I’m not sure how emphasising “consumer spending as a driver of the economy” would make one a Keynesian.”
I’m certainly not an expert on Keynes, but it seems to me that Keynes argued that investment was eratic, unreliable and subject to “animal passions.” So he advocated stimulating of demand by the government in order to keep consumers spending. And that’s why he considered savings to be evil; he saw them as a “leakage” of money out of the circular flow that keeps the economy running. That’s why mainstream economists follow consumer sentiment and spending so closely. They mistake, as did Keynes, demand for a product as equal to demand for labor.
Austrians placed investment at the heart of economic growth and demand for labor. Keynes replaced it with consumer spending or government spending. Keynes may have seen eratic investing as the cause of business cycles, but he viewed spending as the cure, which means that a slow down in spending, that is, an increase in savings, can cause a recession. For Austrians, only the Fed can cause a recession.
Roger M,
I don’t think many modern economists follow consumer spending because they think it drives the economy. In fact, consumer spending as a percent of GDP stays fairly constant from year to year. If you could tell me what GDP would be next year, I could probably tell you what consumer spending would be. The real question is what determines income in the first place.
According to Keynes, fluctuations in aggregate demand (largely driven by swings in investment spending) were responcible for the economy diverging from full employment.
What was Keynes solution? Not increasing consumer spending (though I don’t think he would object to it). He recomended replacing faltering private investment with government investment through public works programs.
So why do many modern economists follow consumer spending? Because it can be a sign that the economy is headed into recession. Think of it this way. Consumer spending is the trembling tree leafs that let you know a storm is comming. The shaking of the leafs doesn’t cause the storm, it’s the other way around.
In the same way, a drop in the ammount of dollars consumers are spending is an indication that they have less dollars to spend (i.e. GDP/national income is falling/we’re headed for recession).
But let’s stay away from talking about “mainstream” economists. Robert Barro and Robert Lucas wouldn’t agree with this analysis (or Keynes) and they’re about as “mainstream” as you can get. For some reason the Mises Blog conception of “mainstream” is stuck in 1964. There have been a lot of interesting things going on in economics since then. You should check it out.
“He recomended replacing faltering private investment with government investment through public works programs.”
But the reason he wanted more government spending was to put money in consumers pockets. Otherwise, why would Keynes have opposed savings so vehemently?
“So why do many modern economists follow consumer spending? Because it can be a sign that the economy is headed into recession.”
They think it’s a sign of one, but check out the last recession. Consumer spending didn’t falter. Neither does a slow down in consumer spending mean consumers have less money; it could mean that they have decided to save more of their income.
I think I have an idea of what mainstream econ teaches since I have an MA in econ and was force fed Keynesianism.
Well, it’s partially a different question. One question is “why do recessions happen”. For Keynes, the broad answer would be “fluctuations in aggregate demand.” Such a fluctuation could, concieveably, come from anywhere.
As you know, the old paradox goes something like this. If everyone suddenly tries to save more money, aggregate demand will falter, income will drop, and absolute savings wont increase. This is because (according to Keynes) the interest rate doesn’t do a very good job of co-ordinating saving-investment decisions.
But this isn’t (as I understand it) what Keynes thought drove the business cycle. It’s an empirical regularity that the ammount people spend (and conversley, the ammount they save) remains constant from year to year as a fraction of GDP. We can’t say the same for investment.
Now, if you want to agrue that Keynes was wrong, that’s one thing. But stick to what he actually said. Or at least, the best sense anyone can make of it.
For a decent description of the Keynesian framework by an Austrian, check out this article by Roger Garison.
http://www.auburn.edu/~garriro/cbm.htm
I recomend him because I know how you Mises Blog types distrust anything “outside the family.”
“It’s an empirical regularity that the ammount people spend (and conversley, the ammount they save) remains constant from year to year as a fraction of GDP.”
Then why are mainstream econs so worried that our savings rate is so much lower now than in the past? Also, are people totally oblivious to interest rates? I think even Keynes recognized that people will save more when interest rates are higher.
Since GDP consists mostly of consumer items, then a reduction in consumer spending is the same thing as a reduction in GDP for the most part. The main difference between an Austrian and Keynesian perspective is the cause. Is a fall in aggragate demand a cause or effect? As the circular flow diagram taught in most macro classes shows, Keynesians believe that aggragate demand is a cause of business cycles. Austrians demonstrate that it’s an effect. The Fed raises interest rates in order to correct the problems caused by its previously low rates. The higher rates reduce business investment and therefore demand for labor. The lower demand for labor reduces consumer spending.
An empircal example of the latter is the excellent record of the yield curve in predicting recessions. When short-term rates exceed long-term rates, we know a recession is near.
It might not be useful to (exclusively) link to and/or listen to economists that are pessimists by nature. That’s a perception and thinking bias – I’d rather listen to someone that is right about the ups and the downs and that is psychologically capable of getting it right about recoveries. I don’t recall ever seeing a link to a positive story about the U.S. economy, even though I’ve watched Mises.org almost daily for many years.
There was money to be made in the internet boom, the real estate boom, the slide in the dollar, the rally in Gold / oil and there might be money to be made in the next market. If we get to catastrophe, it will be on the market’s schedule – and will likely be when many pockets of weakness are present. Obviously there were strengths that were missed by quite a few pessimists over the last 10 years.
I’ve also found that pessimists are bad at timing and usually have little sense of what markets will rally unless it’s a “the sky is falling” market (like Gold). So huge amounts of excellent opportunities pass by.
These arguments for consumer spending/saving being a constant and averting recession fit as long as consumer real wages continue to grow (there not), inflation stays in check (it’s not) and goverment debt’s in controled (it’s not). The latter allows for work projects to replace consumer spending and keep the economy rolling should consumer spendings dry up thereby shouldering the load for groath. With real wages flat, saving very low and lost spending to energy’s inflation and all its componants this bodes poorly for the near and long term. Lower taxes to higher wage earners, war beniting a small segment of industry and continued depleation of the treasury as the boomers advance into retirement and the eventual drain on the U.S. Treasury. Where’s the money going to come from. Basic economics tells you, you have to have a well to draw from to continue to grow. When all well’s are dry what are you left with inflation/recession/depression.
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