Wednesday, December 14, 2011

Nathan Lewis continues to embarrass himself

I've written about this before. Nathan has written an excellent and inspiring series of articles about traditional urbanism, beginning with The Eco-Metropolis. But he's also a gold-standard crank. This poses a difficulty for me. How can I recommend his site to people, when they will find some really bad writing on economic issues there?

Let's take a look at his latest offering:
The distinguishing characteristics of a Keynesian are easy to identify. In response to a recession, they recommend expanded government spending – they usually boast outright that it doesn’t matter what the money is spent on, even egregious waste — and some sort of “easy money” policy. [..] Keynesians generally don’t have any ideas except for these. None at all.
Wrong, Nathan. This theory of macroeconomics draws from the work of English economist John Maynard Keynes who surmised that it was possible for individual "rational" decisions to add up to an inefficient overall outcome. In other words: markets were not perfectly self-regulating and they could lead to extended human misery for no good reason. Therefore, an active government policy role -- both fiscal and monetary -- was required to tamp down the excesses of the business cycle. Keynes was especially interested in solving this problem because of the Great Depression. Many of the ideas found in his work are older, but have been grouped under "Keynesian economics" because he put them together into one general theory.

What does all this mean in practice? The simplest answer is this: the government plays a counter-cyclical role relative to the private sector. When times are good, and the economy is booming, the government should take steps to pay down its debt and reduce inflation. When times are bad, and a depression is looming, the government should do whatever it takes to prevent unemployment from passing a critical level, even if that requires taking out loans and providing "stimulus." The former principle is just as important as the latter.

Keynesian economics provided models that were successfully used for the following forty years to manage the economies of many countries, including the United States. However, those models were unable to explain the phenomenon of hyper-inflation in the 70s, so they went out of favor, and some alternatives have come and gone, including monetarism, the Austrian school and Real Business Cycle theory. Other economists responded to critiques by producing New Keynesian models, instead. Since 2007, as we nearly dipped into a second Great Depression, Keynesian-style economics has been re-popularized, as the alternatives have all failed to explain the conditions we are seeing today.

For example, Nathan goes on to make this claim:
Today, Keynesianism is in its era of final absurdity. With governments now running into their borrowing limits across the globe, the idea of deficit-spending your way to prosperity is mostly off the table.
If Nathan and his cohort of Austrian economist friends were right, US treasury rates would be sky-high. Unfortunately for him, he didn't bother to check the facts. If he had, he would have learned this:

Far from running into any kind of "borrowing limit", United States Treasury bonds are more popular than ever. People are willing to loan the government money at a zero percent interest rate! Even when real interest rates have dipped into negative numbers, people are willing to effectively PAY an interest rate in order to hold bonds. So much for final absurdity.

Still obsessed about gold:
The United States used a gold standard system for 182 years, 1789-1971, and became the wealthiest country in human history.
Except, of course, when FDR abandoned it in order to save the economy during the Great Depression. And then there's the period of economic growth following WWII, when Keynesian thought guided the creation of the Bretton Woods system, based heavily on capital controls.

More silliness:
At that point, a gold standard system will seem straightforward and inevitable. Once you decide that you want Stable Money, instead of Ben Bernanke’s funny money fiesta, the solution is obvious.
And reality:

Inflation as measured by CPI has trended low and stayed under 2.5% since the beginning of the crisis. It nearly dipped to zero, and by some measures, we saw deflation for some months in the last couple years.

I have been talking generally about Keynesian macroeconomic theories, and how they have been successful in recent years compared to other theories, while objecting to Nathan Lewis's characterization. To be fair, the issue is far more complex than this: there are many models, and none of them are perfect for every situation. If you are interested in learning more about this, you should go ahead and read about how real economists work. Whichever way you go, the most important thing is to check predictions against the real world data, which is easier than ever to do nowadays.

It is really frustrating for me to have to debunk Nathan. I really like his writing on cities, his style is a lot of fun to read. But these economic matters are also important. And sadly, he is better known for his crank writing than his good writing.

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