A Critique of Tyler Cowen&#39;s The Great Stagnation, by way of Alex Tabarrok&#39;s Criticism of Keynesian Politics

by Mike Kimel

A Critique of Tyler Cowen's The Great Stagnation, by way of Alex Tabarrok's Criticism of Keynesian Politics

Alex Tabarrok and Tyler Cowen are libertarian professors from George Mason University who post at the very popular Marginal Revolution blog. I often don't agree with what they write, but its usually well reasoned and grounded in reality. (Unlike, say, what comes up in a number of other libertarian blogs.)

Cowen recently wrote an e-book called The Great Stagnation< I haven't read it - I'm swamped these days. However, there have been many reviews (and comments by Cowen himself, so I think I can provide a brief summary. Essentially, Cowen notes that in the last few decades (since about the early '70s), real economic growth in the US has slowed. (That won't be a surprise if you read Presimetrics.) His thesis is that this has to do with technological development - we've eaten the low hanging fruit, and further technological progress (and hence real economic growth) will be slow until we get off the plateau we're on.

It might seem unrelated, at first, but Cowen's partner at Marginal Revolution, Alex Tabarrok, recently had written a post that received some comment. Tabarrok argues that whether Keynesian economics can work or not (he does not believe it can - presumably he wouldn't be a libertarian if he did), Keynesian politics has failed, in that it simply hasn't been tried in this country, not during the two big economic disasters of the last 100 or so years: the Great Depression and the Great Recession.

Tabarrok is wrong - wrong that Keynesian economics hasn't been tried, and wrong that it hasn't worked. And Cowen, it turns out, is wrong about exactly the same thing in his book.

The basic Keynesian idea is this: economic downturns (and meltdowns) can occur and/or be prolonged and worsened when the private sector becomes worried and cuts back. In those circumstances, the government should step in and buy things, lots and lots of things, replacing the shrunken private sector demand. Once the economy picks up again, the government should cut back on its spending and start saving up money, first to pay for its recent spending bout and second to have cash in hand to cover its next necessary spending bout.

Put another way - a government thinking along Keynesian lines will tend to run a deficit when real private sector spending falls below some prior highwater mark. It will run a surplus in years real spending exceeds prior real private sector spending. There may, of course, be exceptions in any given year, but a Keynesian government will generally follow that sort of behavior. A government that runs a deficit when real private sector spending is rising, or runs a surplus when real private sector spending is falling, and behaves this way in general is most definitely not operating under Keynesian principles.

Which brings us to data. Surplus and deficit information was computed using current federal gov't receipts and expenditures from the BEA's NIPA Table 3.2 Real private sector spending is made up of real "personal consumption expenditures" and real "gross private domestic investment" from BEA's NIPA Table 1.1.5 Data goes back to 1929, the first year for which the BEA computed data.

The following graph may look a bit odd, since it has no curve on it. But it shows something cool. If I did this correctly, the gray bars show periods when:

1. real private sector spending hit a new high and the government ran a surplus

2. real private sector spending fell below a previous high and the government ran a deficit

Keynesian governments will generally behave in that way. The turquoise bars show non-Keynesian behavior:

1. real private sector spending hit a new high and the government ran a deficit

2. real private sector spending fell below a previous high and the government ran a surplus

Here's what it looks like:

Figure 1

Here's what I get from this graph... from until some time around the late 60s or early 70s, US governments generally stuck to Keynesian policies and not incidentally, generally produced relatively rapid growth. After that, the US government generally abandoned Keynesian policies and produced Tyler Cowen's Great Stagnation. I am not prepared on to comment on whether there has been technological stagnation though.

Perhaps the graph can be improved. Its important not to consider individual years Keynesian or not, but rather overall behavior over a number of years. For instance, the fact that the government ran a deficit during the recession in 1990 - 1991 doesn't make it Keynesian behavior (though it does appear to have a gray graph) since it had been running a deficit already, even when times were good. Running a deficit when times are bad is only Keynesian if you're paying down debt (i.e., running a surplus) when times are good. The fact that the government has been running a deficit more or less continuously since the late 1960s (except for a brief period in the 90s) indicates that it definitely wasn't following Keynesian economic theory - else it would be running surpluses when real private spending was up.

Well, gotta run. As always, if you want my spreadsheet, drop me a line. I'm at my first name (mike) period my last name (one m only in my last name!!!) at gmail period com. And don't forget which post your writing about. Toodle-oo, folks.

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